Chapter 9 – Discounting of note receivable

Problem 9 - 1

Mar. 1 Cash 503,500

Loss on note discounting 6,500
Notes receivable 500,000
Interest income 10,000

Principal 500,000
Add: Interest (500,000 x 12% x 6/12) 30,000
Maturity value 530,000
Less: Discount (530,000 x 15% x 4/12) 26,500
Net proceeds 503,500

Principal 500,000
Accrued interest receivable (500,000 x 12% x 2/12*) 10,000
Carrying amount of NR

Full term of the note (6 months)

Discount period – unexpired term (2 months expired from January 1 to March 1, hence 4 months left)
Actual interest (From January 1 to March 1)

Discount = Maturity value x Discount rate x Discount period

“Always over 12”

July 1 - The customer paid the bank in full

“No entry”

Problem 9 – 2

Discounting with recourse

If the discounting is with recourse, the transaction is accounted for as either of the following:
1. Conditional sale of note receivable recognizing a contingent liability
2. Secured borrowing

Conditional sale
- “Note receivable discounted” account is credited instead of the account “note receivable”

Note receivable discounted = Face amount of note receivable

The note receivable discounted account is deducted from the total notes receivable when preparing the
statement of financial position with disclosure of the contingent liability.

Principal 2,000,000
Add: Interest (2,000,000 x 12% x 60/360) 40,000
Maturity value 2,040,000
Less: Discount (2,040,000 x 15% x 45*/360) (38,250)
Net proceeds 2,001,750

* 47 days remaining. Considered as 1 ½ month remaining.

June 4 Accounts receivable (2,040,000 + 10,000) 2,050,000

Cash 2,050,000
To record the payment to bank

Note receivable discounted 2,000,000

Note receivable 2,000,000
To cancel the contingent liability

July 4 Cash 2,070,000

Accounts receivable 2,050,000
Interest income ( 2,000,000 x 12% x 30/360) 20,000

Maturity value

On June 4, the total payment is charged to accounts receivable.

On July 4, receipt of cash from the customer for the full amount of indebtedness (2,040,000 + 10,000)
plus interest on the original face value (P20,000).

30 days – June 4 to July 4

June 4 - The customer dishonored the note. Because of the dishonored note, the company paid the bank
plus charges, and then, the company should be removed the dishonored note to notes receivable
account and transferred to accounts receivable plus interest and other charges.

July 4 - The customer paid the note 30 days after the time when he dishonored the note. The time of
interest that will use to calculate is 30 days (From June 4 to July 4).

Interest – money paid regularly at a particular rate for the use of money lent, or for delaying the
repayment of a debt.
Problem 9 – 3

“Received note in payment of an account”

Debit: Note receivable

Credit Accounts receivable

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May 25 Notes receivable 1,500,000

Interest income 4,500
Accounts receivable 1,504,500

- Received from C, a customer, a P1,500,000, 60-day 12% note dated May 15 and made by Company X.
Gave the customer credit for the maturity value of the note less discount at 12%.

*The note is recoded at face amount.

--

June 7 Accounts receivable (510,000 + 20,000) 530,000

Cash 530,000

Note receivable discounted 500,000

Note receivable 500,000

18 Cash 532,650
Accounts receivable 530,000
Interest income (530,000 x 12% x 15/360) 2,650

“June 18 - Received full payment from A including interest of 12% on total amount due (P530,000) from
maturity date of original note (15/360).”

Requirement b – Adjustments on June 30

2.

Note receivable discounted 1,000,000

Notes receivable 1,000,000

To cancel the contingent liability on B’s note. This note matured on May 31. Since there is no notice of
dishonor, it is assumed that the said note is paid on the date of maturity.

Note: Regarding Concept of Materiality, for the exact days being ignored.
Problem 9 - 4

June 30 Accounts receivable 206,000

Notes receivable 200,000
Interest income (200,000 x 12% x 90/360) 6,000

In full term
The Company should remove the dishonored note to notes receivable account and transferred to
accounts receivable plus interest and other charges.

Sept. 28 Cash 210,120

Accounts receivable 206,000
Interest income (206,000 x 12% x 60/360) 4,120

“Collected the defaulted EF note plus accrued interest 12% per annum on the total amount due.”

From the time of default to the date of the collection of default.

- July 30 to September 28 (60 days)

*Connected to past transaction:

July 30 Accounts receivable 206,000

Notes receivable 200,000
Interest income (200,000 x 12% x 90/360) 6,000

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Dec. 30: Collection of notes receivable on sales has an entry of interest income

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Nov. 1: The payment on the bank in case of default of the customer is maturity value plus other charges.
Dec. 31: The Company will receive also the same payment from default customer the total amount due,
the maturity value plus charges. Moreover, the total amount due may include additional interest.

Problem 9 - 5

Under secured borrowing, “Liability for note receivable discounted” is credited instead of “Note
receivable discounted” or simply “Notes receivable” for the initial transaction.

Interest expense is used instead of loss on note discounting. There’s no gain or loss on secured
borrowing.

“The customer paid the note to the bank”

- The liability for note receivable discounted and note receivable is derecognized.

Risk:
• Discount: “unexpired term”
• Recognition of additional interest on the collection from default customer.
• Basis of additional interest