ASSIGNEMENT AND FACTORING

Problem 18-1
Moon Company assigned P3,000,000 of accounts receivable as collateral for a
P2,000,000 loan with a bank. The bank assessed 4% finance fee and charged 6% interest on
the note at maturity.

What would be the journal entry to record the transaction?

a) Debit cash P1,920,000, debit finance charge P80,000 and credit notes payable
P2,000,000.
b) b. Debit cash P1,920,000, debit finance charge P80,000 and credit accounts receivable
P2,000,000.
c) Debit cash P1,920,000, debit finance charge P80,000, debit due from the bank
P1,000,000 and credit accounts receivable P3,000,000.
d) Debit cash P 1,880,000, debit finance charge P120,000 and credit note payable
P2,000,000.

Solution 18-1 Answer A

Face amount of loan 2,000,000

Finance fee ( 4% x 2,000,000) (80,000)
Cash received 1,920,000

Journal entry

Cash 1,920,000
Finance charge 80,000
Note payable 2,000,000

Insight
Assignment of accounts receivable is a secured borrowing not a sale therefore the gain
or loss is not recognized.

Problem 18-2
On December 1, 2021, Bamboo Company assigned specific accounts receivable totaling
P4,000,000 as collateral on a P3,000,000, 12% note from a certain bank. The entity will
continue to collect the assigned account receivable.
In additional to the interest on the note, the bank also charged a 5% finance fee
deducted in advance on the P3,000,000 value of the note.
The December collections of the assigned accounts receivable amounted to P2,000,000
less cash discounts P100,000. On December 31, 2021, the entity remitted the collection to the
bank in payment of the interest accrued on December 31, 2021 an the note payable.
The entity accepted sales return of P150,000 on the assigned accounts and wrote off
assigned accounts of P200,000.
 1. What amount of cash was received from the assigned of accounts receivable on
December 1, 2021?
a. 4,000,000
b. 3,000,000
c. 3,800,000
d. 2,850,000

2. What is the carrying amount of note payable on December 31, 2021?

a. 1,000,000
b. 1,100,000
c. 1,130,000
d. 1,460,000

3. What is the balance of accounts receivable – assigned on December 31, 2021?

a. 2,100,000
b. 2,000,000
c. 1,650,000
d. 1,850,000

Solution 18-2
Question 1 Answer – D

Note payable 3,000,000

Finance fee (5% x 3,000,000) ( 150,000)
Cash received on December 1 2,850,000

Question 2 Answer – C

Note payable 3,000,000

Principal payment
Remittance 1,900,000
Interest (3,000,000 x 12% x 1/12) ( 30,000) 1,870,000
Note payable – December 31 1,130,000

Question 3 Answer – C

Accounts receivable – assigned 4,000,000

Collections (1,900,00)
Sales discounts ( 100,000)
Sales returns ( 150,000)
Accounts written off ( 200,000)
Accounts receivable – assigned December 31 1,650,000

Face amount of accounts collected 2,000,000

Sales discounts ( 100,000)
Collection of accounts assigned 1,900,000

Accounts receivable – assigned 1,650,000

Note payable (1,130,000)
Equity of Bamboo Company in assigned accounts 520,000

Insight
Note payable are reported as current liability and equity in assigned is disclosed only.

Problem 18-3
Zeus Company factored P6,000,000 of accounts receivable to finance entity at the end
of the current year. Control was surrendered by Zeus Company. The factor assessed a fee of a
3% and retained a holdback equal to 5% of the accounts receivable. In addition, the factor
charged 15% interest computed on a weighted average time to maturity of the accounts
receivable of 54 days.

1. What is the amount of cash initially received from the factoring?

a. 5,296,850
b. 5,386,850
c. 5,476,850
d. 5,556,850
2. If all accounts are collected, what is the cost of factoring the accounts receivable?
a. 313,150
b. 180,000
c. 433,150
d. 613,150

Solution 18-3
Question 1 Answer – B

Accounts receivable 6,000,000

Factor’s holdback (6,000,000 x 5%) ( 300,000)
Factoring fee (6,000,000 x 3%) ( 180,000)
Interest (6,000,000 x 15% x 54/365) (133,150)
Cash initially received from factoring 5,386,850

Question 2 Answer – A
Factoring Fee 180,000
Interest 133,150
Total cost of factoring 313,150
Problem 18-4

Cynthia Company factored P750,000 of accounts receivable at year – end. Control was
surrendered. The factor accepted the accounts receivables subject to recourse for nonpayment.
The fair value of nonpayment obligation is P20,000.

The factor assessed a fee of 2% and retained a holdback equal to 4% of the accounts
receivable.

In addition, the factor charge 12% interest computed on a weighted average time maturity of 51
days.

1. What is the amount initially received from the factoring?

a. 692,425
b. 720,000
c. 722,425
d. 705,000

2. What is the total amount should be recognized initially loss on factoring the account
receivable?
a. 12,575
b. 15,000
c. 27,575
d. 47,575

Solution 18-4
Question 1 Answer – A

Accounts receivable 750,000

Factor’s holdback (4% x 750,000) ( 30,000)
Factoring fee (2% x 750,000) ( 15,000)
Interest (750,000 x 12% x 51/365) 12,575
Cash initially received from factoring 692,425

Question 2 Answer – D

Factoring fee 15,000

Interest 12,575
Recourse obligation 20,000
Total lost on factoring initially recognized 47,575

Insight
Interest based from weighted average time the dominator is 365 otherwise it is 360 in
the absence in the contrary.;
Problem 18-5
Camia Company sold accounts receivable without recourse for P5,300,000. The entity received
P5,000,000 cash immediately from the factor.

The remaining P300,000 will be received once the factor verifies that none of the accounts
receivable is in dispute.

The accounts receivable had a face amount of P6,000,000. The entity had previously
established an allowance for bad debts of P250,000 in connection with such accounts.

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

a. 700,000
b. 450,000
c. 750,000
d. 300,000

Solution 18-5 Answer – B

Sale price 5,300,000

Carrying amount of accounts receivable
(6,000,000 – 250,000) 5,750,000
Loss on factoring ( 450,000)

Problem 18-6

Mazda Company sold P5,800,000 in accounts receivable for cash of P5,000,000. The factor
withheld 10% of cash proceed to allow for possible customer returns and other adjustments.

An allowance for doubtful accounts of P600,000 had previously been established by the entity in
relation to these accounts.

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

a. 200,000
b. 700,000
c. 500,000
d. 800,000

Solution 18-6 Answer – A

Sale price 5,000,000
Carrying amount( 5,800,000 – 600,000) 5,200,000
Loss on factoring ( 200,000)
Problem 18-7

Crater Company factored without recourse P2,000,000 of accounts receivable with a bank.

The finance charge is 3% and 5% was retained to cover sales discounts, sales returns and
sales allowances.

1. What is the amount of cash received on the sales of account receivable?

a. 1,940,000
b. 1,900,000
c. 1,840,000
d. 2,000,000

2. What amount should be recognized as loss on factoring?

a. 100,000
b. 160,000
c. 60,000
d. 0

Solution 18-7
Answer 1 – C

Accounts receivable 2,000,000

Finance charge (3% x 2,000,000) (60,000)
Factor’s holdback (5% x 2,000,000) (100,000)
Cash received from factoring 1,840,000

Solution 18-7
Answer 2 – C

Loss on factoring – equal to finance fee 60,000

Problem 18-8

Daisy Company sold accounts receivable without recourse with face amount of P6,000,000.

The factor charges 15% commission on all accounts receivable factored and withheld 10% of
the accounts factored as protection against customers returns and adjustements

The entity had previously established an allowance for doubtful accounts of P200,000 for these
accounts.
By year end, the entity had collected the factor’s holdback there being no customer returns and
other adjustments.
 1. What is the amount received initially from the factoring?
a. 4,500,000
b. 5,400,000
c. 5,100,000
d. 6,000,000

2. What amount should be recognized as loss from factoring?

a. 700,000
b. 900,000
c. 200,000
d. 0

Solution 18-8
Answer 1 – A

Accounts receivable 6,000,000

Factor’s holdback (10% x 6,000,000) ( 600,000)
Commission ( 15% x 6,000,000) ( 900,000)
Cash received 4,500,000

Solution 18-8
Answer 2 – A

Account receivable factored 6,000,000

Commission ( 900,000)
Net sale price 5,100,000
Carrying amount of AR (6,000,000 – 200,000) 5,800,000
Loss on factoring ( 700,000)

Problem 18-9

Freeway Company financing to other entities by purchasing their accounts r5eceivable on a

nonrecourse basis. Freeway charges clients a commission of 15% on all receivable factored.

In addition, freeway withholds 10% of receivables factored as protection against sales return
and other adjustments.

Freeway credit 10% withheld to the Clients Retainer accounts and makes payment to the client
at the end of each month so that the balance in the retainer is equal to 10% of unpaid
receivables at the end of the month.

Experience has led Freeway to established an allowance for doubtful accounts of 4% of all
unpaid receivables purchased.
During the current year, freeway purchased receivables from Motorway Company totaling
P3,000,000. Motorway had previously established an allowance for doubtful accounts for those
receivables at P100,000.

By year- end Freeway had collected P2,500,000 on these receivables.

1. What amount of cash was initially received by Motorway company from Freeway
Company?
a. 2,250,000
b. 3,000,000
c. 2,550,000
d. 2,700,000

2. What amount of loss on factoring should be recognized by Motorway Company?

a. 350,000
b. 450,000
c. 650,000
d. 750,000

Solution 18-9
Answer 1 – A

Accounts receivable 3,000,000

Commission (15% x 3,000,000) ( 450,000)
Holdback (10% x 3,000,000) ( 300,000)
Cash initially received 2,250,000

Solution 18-9
Answer 2 – A

Accounts receivable 3,000,000

Commission ( 450,000)
Net sale price 2,550,000
Carrying amount of accounts receivable 2,900,000
Loss on factoring ( 350,000)

Problem 18-10
During the second year of operation, Shark Company found itself in financial difficulties. The
entity decided to use the accounts receivables as a means of obtaining cash to continue
operations.

On July 1, 2021, the entity sold P1,500,000 of accounts receivable for cash proceeds of
P1,400,000. No allowance for doubtful accounts was associated with these accounts.
On December 15, 2021, the entity assigned the remainder of its accounts receivable,
P5,000,000 as of the date, as collateral on a P2,500,000, 12% annual interest rate loan from
Finance Company. The entity received P2,500,000 less a 2% finance charge.

None of the assigned accounts had been collected by the end of the year. It is estimated that
10% of accounts receivable would be uncollected.
The entity revealed the following data on December 31, 2021:

Accounts receivable, excluding factored

and assigned accounts 1,000,000
Accounts receivables – assigned 5,000,000
Accounts receivable – factored 1,500,000
Allowance for doubtful accounts before adjustments 100,000

1. What total amount received from financing accounts receivables?

a. 3,900,000
b. 3,850,000
c. 3,950,000
d. 4,000,000

2. What is the net realizable value of accounts receivable on December 31, 2021?
a. 4,500,000
b. 5,400,000
c. 6,000,000
d. 5,000,000

3. What amount should be recognized as doubtful accounts expense for 2021?

a. 600,000
b. 500,000
c. 650,000
d. 0

Solution 18-10
Answer 1 – B

Proceed from factoring 1,400,000

Proceeds from loan (2,500,000 x 98%) 2,450,000
Total cash received 3,850,000

Solution 18-10
Answer 2 – B

Accounts receivable – unassigned 1,000,000

Accounts receivable – assigned 5,000,000
Total accounts receivable 6,000,000
Allowance for doubtful accounts (10%x6,000,000) ( 600,000)
Net realizable Value 5,400,000

Solution 18-10
Answer 3 – B

Required allowance – December 31, 2021 600,000

Allowance for doubtful accounts before adjustment 100,000
Doubtful account expense for 2021 500,000

DISCOUNTING OF NOTE RECEIVABLE

Problem 19-1
Roth Company Received from a customer a one – year, P 500,000 note bearing annual
interest of 8%.

After holding the note for six months, the entity discounted the note without recourse at 10%.

1. What amount of cash was received from the bank?

a. 540,000
b. 523,810
c. 513,000
d. 495,238

Solution 19-1
Answer C

Principal 500,000
Add: Interest ( 500,000 x 8%) 40,000
Maturity value 540,000
Less: Discount (540,000 x 10% x 6/12) 17,000
Net proceeds 513,000

Problem 19-2

On July 1, 2021, Lee Company sold goods in exchange for P2,000,000, 8- month, noninterest-
bearing note receivable.

At the time of the sale, the market rate of interest was 12%. The entity discounted the note at
10% on September 1,2021.

1. What amount of cash is received from the discounting?

 a. 1,940,000
b. 1,938,000
c. 1,900,000
d. 1,880,000

2. What amount should be recognized as loss on notes receivable discounting?

a. 100,000
b. 75,000
c. 25,000
d. 0

Solution 19-2
Answer 1 – C
Principal – maturity value 2,000,000
Less: Discount (2,000,000 x 10% 6/12) 100,000
Net proceeds 1,900,000

Solution 19-2
Answer 2 – A

Net proceeds 1,900,000

Carrying amount of note receivable (2,000,000)
Loss on note receivable discounting (100,000)

Problem 19-3
Apex Company accepted from a customer P1,000,000 face amount 6- month, 8% note dated
April 1, 2021.

On the same date, the entity discounted the note without recourse at a 10% discount rate.

1. What amount of cash is received from note discounting?

a. 900,000
b. 990,000
c. 988,000
d. 972,000

2. What amount should be recognized as loss on note receivable discounting?

a. 50,000
b. 40,000
c. 52,000
d. 12,000
Solution 19-3
Answer 1 – C
Principal 1,000,000
Add: interest (1,000,000 x 8%x 6/12) 40,000
Maturity value 1,040,000
Less: Discount (1,040,000 x 10% x 6/12) 52,000
Net proceeds 988,000

Solution 19-3
Answer 2 – C

Net proceeds 988,000

Carrying amount of the note receivable – equal to principal (1,000,000)
Loss on the note receivable discounting ( 12,000)

Problem 19-4
On June 30, 2021, Ray Company discounted at the bank a customer P6,000,000, 6- month,
10% note receivable last April 30,2021.

The bank discounted the note at 12% without recourse.

1. What amount of cash is received from the note receivable discounting?

a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000

2. What amount should be recognized as loss on note receivable discounting?

a. 252,000
b. 152,000
c. 52,000
d. 48,000

Solution 19-4
Answer 1 – C

Principal 6,000,000
Add: interest (6,000,000 x 10% x 6/12) 300,000
Maturity value 6,300,000
Less: Discount (6,300,000 x 12% x 6/12) 252,000
Net proceeds 6,048,000
Solution 19-4
Answer 2 – C

Principal 6,000,000
Accrued interest (6,000,000 x 10% x 2/12) 100,000
Carrying amount of note receivable 6,100,000

Net proceeds 6,048,000

Carrying amount of the note receivable (6,100,000)
Loss on the note receivable discounting ( 52,000)

Problem 19-5

On July 1, 2021, Kay Company sold equipment to Mando Company for P1,000,000. Kay
accepted a 10% note receivable for the entire sales price.

This note is payable in two equal installments of P500,000 plus accrued interest on December
31,2021 and December 31, 2022.

On July 1, 2022, the entity discounted the note at a bank at an interest rate of 12%.

1. What amount of cash was received from the discounting of note receivable?
a. 484,000
b. 493,500
c. 503,500
d. 517,000

Solution 19-5
Answer 1 – D

Principal 500,000
Add: Interest (500,000 x 10%) 50,000
Maturity value 550,000
Less: Discount (550,000 x 12% x 6/12) ( 33,000)
Net proceeds 517,000

Problem 19-6

Rand Company accepted from a customer a P4,000,000, 90 – days, 12% interest bearing note
dated on August 31,2021.
On September 30,2021, the entity discounted the note with recourse at the Apex State Bank at
15%. However, the proceeds were not received until October 2, 2021. The discounting with
recourse is accounted for as a conditional sale with recognition of a contingent liability.

1. What amount was received from the note receivable discounting?

a. 4,017,000
b. 4,120,000
c. 4,103,000
d. 3,965,500

2. What amount should be recognized as loss on note receivable discounting?

a. 40,000
b. 23,000
c. 17,000
d. 20,000

Solution 19-6
Answer 1 – A

Principal 4,000,000
Add: Interest (4,000,000 x 12% x 90/360) 120,000
Maturity value 4,120,000
Less: Discount (4,120,000 x 15% x 60/360) 103,000
Net proceeds 4,017,000

Solution 19-6
Answer 2 – B
Principal 4,000,000
Accrued interest receivable (4,000,000 x 12% x 30/360) 40,000
Carrying amount of note receivable 4,040,000

Net proceeds 4,017,000

Carrying amount of the note receivable (4,040,000)
Loss on the note receivable discounting ( 23,000)

Problem 19-7

On August 31,2021, Sunflower company discounted with recourse a note at the bank at
discounting rate of 15%. The discounting transaction is accounted for as secured borrowing.

The note was received from a customer on August 1, 2021, is for 90- days, has face amount of
P5,000,000 and carries an interest rate of 12%. The customer paid the note to the bank on
October 30, 2021, the date of maturity.
 1. What amount should be recognized as interest expense on August 31, 2021?
a. 50,000
b. 21,250
c. 28,750
d. 25,000

Solution 19-7
Answer C

Principal 5,000,000
Add: Interest (5,000,000 x 12% x 90/360) 150,000
Maturity value 5,150,000
Less: Discount (5,150,000 x 15% x 60/360) 128,750
Net proceeds 5,012,250

Principal 5,000,000
Accrued interest receivable (5,000,000 x 12% x 30/360) 50,000
Carrying amount of notes receivable (5,050,00)

Net proceeds 5,012,000

Carrying amount of the note receivable 5,050,000
Interest expense ( 28,750)