HOMEWORK ON RECEIVABLE FINANCING

Problem 1

On Dec. 5, 2018, Wits Co. sold its accounts receivable (net realizable value, P260,000) for P230,000. 10% of the
proceeds were withheld by the factor to allow for possible customer returns and other account adjustments. The
related allowance for bad debts is P40,000.

1. What amount of loss on factoring should be recognized?

2. What is the entry to record the factoring of accounts receivable?

Problem 2

On Apr. 1, 2018, Radix Corp. assigned accounts receivable totalling P400,000 as collateral on a P300,000, 16%
note from Kostka Bank. The assignment was done on a non-notification basis. In addition to the interest on the
note, the bank also received a 2% service fee, deducted in advance on the P300,000 value of the note.

Additional information is as follows:

a. Collections of assigned accounts in April totalled P191,100, net of a 2% sales discount.

b. On May 1, Radix Corp. paid the bank the amount owed for April collections plus accrued interest on note to
May 1.
c. The remaining accounts were collected by Radix Corp. during May except for P2,000 accounts written off as
worthless.
d. On June 1, Radix Corp. paid the bank the remaining balance of the note plus accrued interest.

Prepare the journal entries to record the above transactions on the books of Radix Corp.

Problem 3

Matrix Inc. purchases the accounts companies on a without recourse, notification basis. At the time the receivables
are factored, 15% of the amount factored is charged to the client as commission and recognized as revenue in
Matrix’s books. Also, 10% of the receivables factored is withheld by Matrix as protection against sales returns or
other adjustments. This amount is credited by Matrix to the Client Retainer account. At the end of each month,
payments are made by Matrix to its clients so that the balance in the Client Retainer account is equal to 10% of
unpaid factored receivables. Based on Matrix’s bad debt loss experience, an allowance for bad debts of 5% of all
factored receivables is to be established. Matrix makes adjusting entries at the end of each month.

On Jan. 3, 2018, Demise Co. factored its accounts receivable totalling P1,000,000. By Jan. 31, P800,000 of these
receivables had been collected by Matrix.

Prepare the entries on Demise’s books to record the above information.

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Problem 4

Havana Pit Corp. sells plastic products to wholesalers. The end of the company’s reporting period is Dec. 31.
During 2018, the following transactions related to receivables occurred:

March 31 Sold merchandise to Maxim Co. and accepted a 10% note. Payment of P120,000
principal plus interest is due on Mar. 31, 2015
April 12 Sold merchandise to Ave Co. for P20,000 with terms 2/10 n/30. Havana Pit uses the
gross method to account for cash discounts.
21 Collected the entire amount due from Ave Co.
27 A customer returned merchandise costing Havana Pit P60,000. Havana Pit reduced the
customer’s receivable balance by P80,000, the sales price of the merchandise. The
company records sales returns as they occur.
May 30 Transferred receivables of P1,000,000 to a factor without recourse for P860,000. The
criteria to derecognize the asset are met. The factor assessed a 5% allowance on the
receivables transferred.
July 31 Sold merchandise to Falcon Co. for P150,000 and accepted an 8%, 6-month note. 8%
is an appropriate rate for this type of note.
September 30 Discounted the Falcon Co. note at the bank. The bank’s discount rate is 12%. The note
was discounted without recourse

1. Prepare the necessary journal entries to account for the above transactions. For transactions involving the
sale of merchandise, ignore the entry for the cost of goods sold.
2. Prepare any necessary adjusting entries at Dec. 31, 2018. Adjusting entries are only recorded at year-end.

Problem 5

On Oct. 31, 2018, Sheeran Co. engaged in the following transactions:

a. Obtained a P500,000, six-month loan from Ed Bank, discounted at 12%. The company pledged P500,000 of
accounts receivable as security for the loan.
b. Factored P1,000,000 of accounts receivable without recourse on a non-notification basis with Louse Corp.
Louse charged a factoring fee of 2% of the amount of receivables factored an withheld 10% of the amount
factored.

How much cash was initially received by Sheeran from the financing of the receivables?

Problem 6

On Dec. 1, 2018, Neon Lights Inc. assigned specific accounts receivable totalling P2,000,000 as collateral on a
P1,500,000, 12% note from a certain bank. Neon Lights will continue to collect the assigned accounts receivable. In
addition to the interest on the note, the bank also charged a 5% finance fee deducted in advance on the P1,500,000
value of the note. The December collections of assigned accounts receivable amounted to P1,000,000 less cash
discounts of P50,000. On Dec. 31, 2018, Neon Lights remitted the collections to the bank in payment for the
interest accrued on Dec. 31, 2018 and the note payable.
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1. What amount of cash was received from the assignment of accounts receivable on Dec. 1, 2018?
2. What is the carrying amount of note payable on Dec. 31, 2018?
3. What amount should be disclosed as the equity of Neon Lights in assigned accounts on Dec. 31, 2018?

Problem 7

When Bali Corp. found itself in severe financial problems, it applied for a loan in Lithgow National Bank. In
accordance with the terms of the application, Bali assigned P5,000,000 of its accounts receivable to the bank. The
receivables serve as a collateral for the assurance of the payment of the loan.

On January 1, 2018, upon the approval of the loan, Lithgow forwarded 80% of the face value of the assigned
accounts less 0.5% of the face value of the note for processing fees. The terms of the loan also states that Bali
should pay 1.5% of the outstanding balance of the note or P50 000, whichever is higher, as interest to be paid every
two months. Notice regarding the balance of the assigned accounts and the payment of interest will be given by
Lithgow every two months. On the same date, the debtors of Bali were informed that their payments should be
forwarded directly to the bank.

On February 28, Lithgow informed Bali that 30% of the assigned accounts were already collected. Half of the
assigned accounts were entitled to the 2% cash discount. Bali also found out in the notice that P80,000 of the
assigned accounts were proven to be worthless, and P20,000 were granted allowances, upon Bali’s approval. A
check for the payment of the interest was sent by Bali on the same date.

After two months, Lithgow sent another notice to Bali stating that the remaining assigned accounts were already
collected. None of them were given any discounts. A check was sent by Lithgow to Bali for the excess collection.

1. What was Bali’s equity on the assigned accounts on February 28?

2. How much cash did Bali receive from Lithgow from the excess collection of the assigned accounts?
3. How much was the total interest incurred by Bali on the note?