Final SLP Accounting For Receivables

INTERMEDIATE ACCOUNTING 1, PART 2 (AE 15a)
LEARNING MATERIAL
Prepared by: Lovely Joy G. Santiago, BSACC-3A
CHAPTER 8 – ACCOUNTS RECEIVABLE

FINANCING
INTRODUCTION
Think of yourself as a small business owner, you realize that sometimes your visions
are much bigger than your wallet. But that’s not a sign that your vision is too large.
It’s simply a sign that it’s time to do accounts receivable financing.
The reality is, sometimes you can’t grow your business using your own financial
resources. Or, maybe you’re in a situation where making payroll is tough to do on
your own right now.
Either way, accounts receivable financing may be the solution to your cash flow
constraints.
This module will focus on the discussion of Receivable Financing which is one of the
topics in the course, Intermediate Accounting 1, part 2. It will discuss the concept of
Accounts Receivable Financing, illustrate the common forms of accounts receivable
financing, and demonstrate the accounting for pledge, assignment and factoring of
accounts receivables.
LEARNING OUTCOMES
At the end of the unit, students will be able to:
 Discuss the concept and purpose of Accounts Receivable Financing.
 Enumerate the sources of financing through accounts receivables.
 Differentiate accounts receivable structured as an asset sale from accounts
receivable structured as a loan agreement.
 Demonstrate the accounting for pledge, assignment and factoring of accounts
receivable.
 Enumerate the characteristics of an assignment.
 Demonstrate the accounting for assignment of accounts receivable through
non-notification and notification basis.
 Differentiate factoring without recourse and factoring with recourse.
 Explain accounting for commissions and interest charge.
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Table of Contents
LESSON 1: INTRODUCTION TO ACCOUNTS RECEIVABLE FINANCING...................................................3
o Accounts Receivable Financing............................................................................................3
o The need to Accounts Receivable Financing........................................................................3
o Structuring: as asset sale vs. as loan agreement.................................................................4
 Asset Sales........................................................................................................................4
 Loan agreement...............................................................................................................4
o References:...........................................................................................................................5
o Assessment..........................................................................................................................5
o Suggested Answers:.............................................................................................................5
LESSON 2: PLEDGING............................................................................................................................6
o Forms of Receivable Financing............................................................................................6
o Pledging/Hypothecating......................................................................................................6
o References:...........................................................................................................................7
o Assessment..........................................................................................................................8
o Suggested Answers:.............................................................................................................9
LESSON 3: ASSIGNMENT.....................................................................................................................11
o Assignment of Accounts Receivable..................................................................................11
o Characteristics of an assignment:......................................................................................11
o Journal Entries: non-notification vs notification...............................................................11
o References:.........................................................................................................................14
o Assessment........................................................................................................................15
o Suggested Answers:...........................................................................................................16
LESSON 4: FACTORING........................................................................................................................19
o Factoring.............................................................................................................................19
o Factoring without recourse................................................................................................19
o Factoring with recourse.....................................................................................................19
o Factor’s holdback...............................................................................................................19
o Commissions and interest charges....................................................................................19
o Accounting for commissions and interest charges............................................................20
o References:.........................................................................................................................22
o Assessment........................................................................................................................22
o Suggested Answers:...........................................................................................................24
SUMMARY...........................................................................................................................................25
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LESSON 1: INTRODUCTION TO ACCOUNTS RECEIVABLE
FINANCING
Contents:
 Definition of accounts receivable financing
 The need to accounts receivable financing
 Accounts receivable structured as an asset sale
 Accounts receivable structured as a loan agreement
Objectives:
At the end of the lesson, the students should be able:
 Discuss the concept of Accounts Receivable Financing
 Explain the need to accounts receivable financing
 Differentiate accounts receivable structured as an asset sale from accounts
receivable structured as a loan agreement
Accounts Receivable Financing

-is the financial flexibility or capability of the company to generate cash out of its
accounts receivable. It is the act of inducing cash inflows from receivables other than
from their normal or scheduled payments.
source: https://www.investopedia.com/terms/a/accountsreceivablefinancing.asp
The need to Accounts Receivable Financing

- Accounts receivables are one type of liquid asset considered when identifying and
calculating a company’s quick ratio which analyzes its most liquid assets:
Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable

Due within One Year) / Current Liabilities
As such, both internally and externally, accounts receivables are considered highly
liquid assets which translate to theoretical value for lenders and financiers. Many
companies may see accounts receivable as a burden since the assets are expected
to be paid but require collections and can’t be converted to cash immediately.
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As such, the business of accounts receivable financing is rapidly evolving because
of these liquidity and business issues. Moreover, external financiers have stepped in
to meet this need.
Structuring: as asset sale vs. as loan agreement

Accounts receivable financing is becoming more common with the development and
integrations of new technologies that help to link business accounts receivable
records to accounts receivable financing platforms. In general, accounts receivable
financing may be slightly easier for a business to obtain than other types of capital
financing. This can be especially true for small businesses that easily meet
accounts receivable financing criteria or for large businesses that can easily
integrate technology solutions.
Overall, there are a few broad types of accounts receivable financing structures.
Asset Sales
Accounts receivable financing is typically structured as an asset sale. In this type of
agreement, a company sells accounts receivable to a financier. This method can be
similar to selling off portions of loans often done by banks.
A business receives capital as a cash asset replacing the value of the accounts
receivable on the balance sheet. A business may also need to take a write-off for
any unfinanced balances which would vary depending on the principal to value ratio
agreed on in the deal.
With asset sales, the financier takes over the accounts receivable invoices and
takes responsibility for collections. In some cases, the financier may also provide
cash debits retroactively if invoices are fully collected.
In asset sale structuring, factoring companies make money on the principal to value
spread. Factoring companies also charge fees which make factoring more profitable
to the financier.
Loan agreement
Accounts receivable financing can also be structured as a loan agreement. Loans
can be structured in various ways based on the financier. One of the biggest
advantages of a loan is that accounts receivables are not sold. A company just gets
an advance based on accounts receivable balances. Loans may be unsecured or
secured with invoices as collateral. With an accounts receivable loan, a business
must repay.
Companies like Fundbox, offer accounts receivable loans and lines of credit based
on accounts receivable balances. If approved, Fundbox can advance 100% of an
accounts receivable balance. A business must then repay the balance over time,
usually with some interest and fees.
Accounts receivable lending companies also benefit from the advantage of system
linking. Linking to a company’s accounts receivable records through systems such
as QuickBooks, Xero, and Freshbooks, can allow for immediate advances against
individual invoices or management of line of credit limits overall.
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References:
 Millan, Z. V. (2020) Intermediate Accounting Volume 1A, Baguio City:
Bandolin Enterprise.
 Valix, C. and Peralta, J. (2020) Intermediate Accounting Volume 1, GIC
Enterprises & Co., Inc.,
Manila
 Asuncion, D. O. (2021) Auditing and Assurance Part 1, Real Excellence
Publishing, Aurora Hill, Baguio City 2600
 https://www.investopedia.com/terms/a/accountsreceivablefinancing.asp
Assessment
1. Briefly discuss the concept of accounts receivable financing. 5 pts.
2. Differentiate accounts receivable structured as an asset sale from accounts
receivable structured as a loan agreement. 5 pts.
3. Why is there a need to accounts receivable financing? 5 pts.
Suggested Answers:
1. Accounts receivable financing is the financial flexibility or capability of the
company to generate cash out of its accounts receivable. It is the act of inducing
cash inflows from receivables other than from their normal or scheduled payments.
2. Accounts receivable structured as an asset sale is when business receives capital
as a cash asset replacing the value of the accounts receivable on the balance
sheet. A business may also need to take a write-off for any unfinanced balances
which would vary depending on the principal to value ratio agreed on in the deal
while accounts receivable structured as a loan agreement is when a company just
gets an advance based on accounts receivable balances. Loans may be unsecured
or secured with invoices as collateral. With an accounts receivable loan, a business
must repay.
3. Both internally and externally, accounts receivables are considered highly liquid
assets which translate to theoretical value for lenders and financiers. Many
companies may see accounts receivable as a burden since the assets are expected
to be paid but require collections and can’t be converted to cash immediately. As
such, the business of accounts receivable financing is rapidly evolving because of
these liquidity and business issues. Moreover, external financiers have stepped in to
meet this need.
5
LESSON 2: PLEDGING
Contents:
 Common forms of receivable financing

 Pledge of accounts receivable
Objectives:
 Enumerate the sources of financing through receivables
 Demonstrate the accounting for pledge of accounts receivable
Forms of Receivable Financing

The common forms of receivable financing are:
a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable (separate module discussion)
Pledging/Hypothecating
-refers to borrowing of money from the bank or any financial institution in which
receivables in general are used as collateral or security for a loan.
NOTE:
In pledging of accounts receivable, there is no transfer of financial asset since the
entity who pledge the accounts receivable retains the control over the pledge
receivable. Since receivables in general are used as collateral, pledging is
sometimes called general assignment.
No complex problems are involved in this form of financing except for the
accounting for the loan. The loan is recorded by debiting cash and discount on
note payable if loan is discounted and crediting note payable. With respect to the
pledged accounts, no entry would be necessary. It is sufficient that the disclosure
thereof is made in a note to financial statement.
Illustration: Pledging of Accounts Receivable

On October 1, 2021, Blackberry Company borrowed P1,000,000 for one year from
Samsung Bank with a stated interest rate of 12%. As a security for the loan,
Blackberry Company hypothecated its accounts receivable amounting to
P1,500,000. Samsung Bank deducted the one-year interest in advance.
Required:
Prepare the entries in relation to the assignment of the accounts receivable,
assuming amortization of interest deducted in advance is to be made equally for the
entire loan term.
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Solution:
Journal Entries are:
Oct. 1 Cash (P1,000,000 – P120,000) P880,000
Discount on notes payable (P1,000,000 x 120,000
12% x 12/12)
Notes payable-bank P1,000,000
Dec. 31 Interest Expense (P120,000 x 3/12) P30,000

Discount on notes payable P30,000
SFP PRESENTATION
SFP – Current Liability P910,000
NOTES TO FS
Note payable P1,000,000
Less: Discount on Note payable (P120,000-P30,000) 90,000
Carrying Value 910,000
STATEMENT OF COMPREHENSIVE INCOME

Interest Expense P30,000
Only the loan transaction is recorded and the pledging of accounts receivable would
only appear in to the note to financial statements.
A note to FS may appear as follows:
“The note payable to bank matures on October 1, 2022 and is secured by accounts
receivable with face value of P1,500,000.”
References:
Manila
7
Assessment
TRUE/FALSE. 6 pts.
1. When loans are obtained from the bank or any lending institution, the accounts
receivable may be pledged as collateral security for the payment of the loan.
2. Normally, the borrowing entity makes the collections of the pledged accounts but
may be required to turn over the collections to the bank in satisfaction for the loan.
3. No complex problems are involved in this form of financing except the accounting
for the loan.
4. The loan is recorded by debiting note payable if loan is discounted, and crediting
cash and discount on note payable.
5. The initial payment of the loan is recorded by debiting note payable and crediting
cash.
6. With respect to the pledged accounts, no entry would be necessary. It is sufficient
that disclosure' thereof is made in a note to financial statement.
ENUMERATION. 4 pts
Enumerate the 4 common forms of receivable financing.
PROBLEM SOLVING. 2 items, 5 pts. each

Item #1. 5 pts.
Pittance Company provided the following information in connection with a bank loan.
March 1 Pittance Company borrowed P2,000,000 from bank on a six-month note
carrying an interest of 12% per annum. Accounts of P3,000,000 are pledged
to secure the loan.
April 1 Pledged accounts of P1,000,000 are collected minus 2% discount.
June 1 Remaining pledged accounts are collected.
Sept. 1 The bank loan is repaid plus interest.
Required:
Prepare Journal Entries to record the transactions.
Item #2. 5 pts.

Idealist Company secured a one-year bank loan of P4,000,000 on October 1, 2020.
The loan was discounted at 10%.
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The entity signed a note for the loan and pledged P5,000,000 of its accounts
receivable as collateral for the same. The accounting period of the entity ends on
December 31.
Required:
1. Prepare Journal Entries, including adjustment from the date of loan up to date of
maturity.
2. Statement Presentation of the bank loan with adequate disclosure on December
31, 2020.
Suggested Answers:
TRUE/FALSE. 6 pts
1. True
2. True
3. True
4. False. The loan is recorded by debiting cash and discount on note payable if
loan is discounted, and crediting note payable.
5. False. The subsequent payment of the loan is recorded by debiting note payable
and crediting cash.
6. True.
ENUMERATION. 4 pts
a. Pledge of accounts receivable
b. Assignment of accounts receivable
c. Factoring of accounts receivable
d. Discounting of notes receivable
PROBLEM SOLVING. 2 items, 5 pts. each

Item #1.
March 1 Cash 2,000,000
Note Payable – bank 2,000,000
April 1 Cash 980,000
Sales Discount 20,000
Accounts receivable 1,000,000
June 1 Cash 2,000,000
Sept. 1 Note Payable – bank 2,000,000
Interest Expense (12% x 2,000,000 x 6/12) 120,000
Cash 2,120,000
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Item #2.
Requirement 1
2019
Oct. 1 Cash 3,600,000
Discount on note payable (10% x 4,000,000) 400,000
Note Payable – bank 4,000,000
1 Interest Expense 100,000
Discount on note payable 100,000
2020
Oct. 1 Note Payable – bank 4,000,000
Cash 4,000,000
Dec. 31 Interest Expense 300,000
Discount on note payable 300,000
Requirement 2
Current Liabilities:
Note Payable – bank (note 3) 4,000,000
Discount on note payable (300,000)
Carrying amount 3,700,000
Note 3 – Note payable – bank
Accounts of P5,000,000 are pledged to secure the bank loan of P4,000,000.
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LESSON 3: ASSIGNMENT
Contents:
 Assignment of accounts receivable

 Characteristics of an assignment
 Assignment of accounts receivable through non-notification
 Assignment of accounts receivable through notification basis
Objectives:
 Explain assignment of accounts receivable.
 Enumerate the characteristics of an assignment.
 Demonstrate the accounting for assignment of accounts receivable through
non-notification and notification basis
Assignment of Accounts Receivable

-means that a borrower called the assignor transfers the rights in some accounts
receivable to a lender called the assignee in consideration for a loan.
Actually, assignment is a more formal type of pledging of accounts receivable.
Assignment is secured borrowing evidenced by a financing agreement and
promissory note which is signed by the assignor.
Compared to pledging, which is general because all accounts receivable serves as a
collateral security for the loan, assignment is specific because in the financing
agreement there is a specific account receivable indicated to serve as collateral for
the loan.
Characteristics of an assignment:
a) The loan in at a specified percentage of the face value of the collateral and
the interest and service fees are charged to the assignor (borrower).
b) The debtors are occasionally notified (notification basis e.g. bank) to make
payments to the assignee (lender) but most assignments are non-
notification basis.
c) Assigned accounts are segregated from other accounts. The notes payable
should be deducted from the balance of A/R assigned to determine the equity
in assigned A/R.
Journal Entries: non-notification vs notification

Non- notification Notification
To separate the assigned accounts:
A/R - assigned xxx A/R - assigned xxx
Accounts receivable xxx Accounts receivable xxx
To record the loan:
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Cash xxx Cash xxx
Service charge xxx Service charge xxx
Notes Payable-bank xxx Notes Payable-bank xxx
Issued credit memo (i.e. sales return):
Sales return xxx Sales return xxx
To record collection:
Cash xxx Notes payable-bank xxx
Sales discount xxx Sales discount xxx
To record remittance:
N/P - bank xxx Interest Expense xxx
Interest Expense xxx Cash xxx
Cash xxx
To record write-off of accounts receivable
Allowance for bad debt xxx Allowance for bad debt xxx
To transfer the remaining balance of A/R - assigned to unassigned
Accounts receivable xxx Accounts receivable xxx
The amount to be transferred to unassigned accounts may be computed as follows:
Total accounts receivable - assigned XX

Less: Collections XX
Sales discount XX
Sales returns XX
Worthless accounts XX (XX)
Balance XX
Illustration – nonnotification basis

April
1 An entity assigned P700,000 of accounts receivable to a bank under a non-
notification arrangement. The bank advances 80% less a service charge of P5,000.
The entity signed a promissory note that provides for interest of 1% per month on the
unpaid loan balance.
5 Issued a credit memo for sales return to a customer whose account as assigned,
P20,000.
10 Collected P300,000 of the assigned accounts less 2% discount.
30 Remitted the total collections to the bank plus interest for one month.
May
7 Assigned accounts of P15,000 proved worthless.
20 Collected P300,000 of the assigned accounts.
30 Remitted the total amount due the bank to pay off the loan balance plus interest for
one month.
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Illustration – notification basis
July
1 An entity assigned P1,000,000 of accounts receivable to a bank under a notification
arrangement. The bank loans 80% less 4% service charge on the gross amount
assigned. The entity signed a promissory note that provides for interest of 1% per
month on the unpaid loan balance.
31 Received notice from bank that P600,000 of the assigned accounts were collected
less 2% discount. A check was sent to the bank for the interest due.
August
31 Received notice from bank that P300,000 of the assigned accounts were collected.
Final settlement was made by the bank for the excess collections together with the
uncollected assignment accounts of P100,000.
Journal Entries:
Non- notification Notification

To separate the assigned accounts:
A/R - assigned 700,00 A/R - assigned 1,000,000
0
Accounts 700,000 Accounts 1,000,000
receivable receivable
To record the loan:
Cash 555,00 Cash 760,000
0
Service charge 5,000 Service charge 40,000
Notes 560,000 Notes 800,000
Payable-bank Payable-bank
Issued credit memo (i.e. sales return):
Sales return 20,000
A/R - 20,000
assigned
Cash 294,00 Notes payable-bank 588,000
0
Sales discount 6,000 Sales discount 12,000
A/R - 300,000 A/R - 600,000
assigned assigned
To record remittance: To record interest fr. NP every end of the
month
N/P - bank 294,00 Interest Expense 8,000
0
Interest Expense 5,600 Cash 8,000
Cash 299,600
To record write-off of accounts receivable
Allowance for bad 15,000
debt
A/R - 15,000
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assigned
Cash 300,00 Cash *85,880
0
A/R - 300,000 Interest Expense **2,120
assigned
N/P - bank ***212,000
A/R - 300,000
assigned
To record remittance:
N/P - bank 266,00
0
Interest Expense 2,660
Cash 268,660
To transfer the remaining balance of A/R - assigned to unassigned
Accounts receivable 65,000 Accounts receivable 100,000
A/R - 65,000 A/R - 100,000
assigned assigned
Non-notification basis:
Total accounts receivable - 700,000
assigned
Less Collections 594,000
:
Sales discount 6,000
Sales returns 20,000
Worthless accounts 15,000 (635,000)
Balance 65,000
Notification basis:
Computation
Loans from bank 800,000
Less July collection by bank 588,000
:
Balance due the bank ***212,000
August collection by bank 300,000

Less Loan balance 212,000
:
Excess collection 88,000
Less Interest (1% x 212,000) **2,120
:
Remittance from bank *85,880
References:
Manila
14
Assessment
TRUE/FALSE. 6 pts
1. Assignment of accounts receivable means that a borrower called the assignor
transfers rights in some accounts receivable to a lender called the assignee in
consideration for a loan.
2. Assignment is a less formal type of pledging of accounts receivable.
3. Assignment is secured borrowing evidenced by a financing agreement and a
promissory note both of which the assignee signs.
4. Pledging is general because all accounts receivable serve as collateral security for
the loan. On the other hand, assignment is specific because specific accounts
receivable serve as collateral security for the loan.
5. When accounts are assigned on a nonnotification basis, customers are not
informed that their accounts have been assigned.
6. When accounts are assigned on a notification basis, customers are notified to
make their payments directly to the assignee.
ESSAY. 10 pts
Explain the characteristics of an assignment.
MULTIPLE CHOICE – PROBLEMS. 4 pts.

Item 1. 1 pt.
Moon Company assigned P3,000,000 of accounts receivable as collateral for a
P2,000,000 loan with a bank. The bank assessed a 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 note payable
P2,000,000.
b. Debit cash P1,920,000, debit finance charge P80,000 and credit accounts
receivable P2,000,000.
c. Debit cash P1920,000, debit finance charge P80,000, debit due from bank
P1,000,000 and credit accounts receivable P3,000,000.
15
d. Debit cash P1,880,000, debit finance charge P120,000 and credit note payable
P2,000,000.
For items 2-4. 3 pts.
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 accounts receivable.
In addition 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 assigned accounts receivable amounted to P2,000,000
less cash discounts of P100,000. On December 31, 2021, the entity remitted the
collections to the bank in payment for the interest accrued on December 31, 2021
and the note payable.
The entity accepted sales returns of P150,000 on the assigned accounts and wrote
off assigned accounts of P200,000.
2. What amount of cash was received from the assignment of accounts receivable
on December 1, 2021?
a. 4,000,000
b. 3,000,000
c. 3,800,000
d. 2,850,000
3. 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
4. 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
Suggested Answers:
TRUE/FALSE. 6 pts
1. True
2. False. Assignment is a more formal type of pledging of accounts receivable.
3. False. Assignment is secured borrowing evidenced by a financing agreement and
a promissory note both of which the assignor signs.
4. True.
5. True.
6. True.
ENUMERATION/ESSAY. 10 pts
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a) The loan in at a specified percentage of the face value of the collateral and
the interest and service fees are charged to the assignor (borrower).
b) The debtors are occasionally notified (notification basis e.g. bank) to make
payments to the assignee (lender) but most assignments are non-
notification basis.
c) Assigned accounts are segregated from other accounts. The notes payable
should be deducted from the balance of A/R assigned to determine the equity
in assigned A/R
Item 1. 1 pt.
Item #1. A - Debit cash P1,920,000, debit finance charge P80,000 and credit
note payable P2,000,000.
Solution
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
No gain or loss is recognized on the transfer of accounts receivable because
assignment of accounts receivable is a secured borrowing and not a sale.
For items 2-4. 3 pts

Item #2. D - 2,850,000
Solution
Finance fee (5% x 3,000,000) (150,000)
Cash received on December 1 2,850,000
Item #3. C - 1,130,000

Solution
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
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Item #4. C - 1,650,000
Solution
Accounts receivable - assigned 4,000,000
Collections (1,900,000)
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)
Collections 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
The note payable is reported as current liability and the accounts receivable
assigned should be included in total accounts receivable.
The equity in assigned accounts is disclosed only.
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LESSON 4: FACTORING
Contents:
 Factoring arrangement.
 Factoring without recourse.
 Factoring with recourse.
 Factor’s holdback
 Accounting for commissions and interest charges.
Objectives:
 Explain factoring arrangement.
 Differentiate factoring without recourse and factoring with recourse.
 Demonstrate accounting for commissions and interest charge.
Factoring
In factoring arrangement, an entity sells accounts receivable to a bank or finance
entity called factor. Factoring is usually done in a notification basis and either on
a without recourse or with recourse.
Factoring without recourse

In this arrangement, the factor assumes the risk of uncollectability and absorbs any
credit losses. Transferor is not held liable in case the debtor fails to pay. It is
considered an outright sale or ordinary sale of receivable, both in form and
substance. In this form of factoring the transaction will lead to derecognition of
financial asset. Most factoring transactions are done on a without recourse basis.
Factoring with recourse

In this arrangement, the transferor guarantees payment to the factor in the event
that the debtor fails to pay. When sold with recourse, the seller promises to buy
back any receivables that are not collected by the purchaser; essentially
guaranteeing payment. The transferor is held liable up to the guaranteed amount
in case the debtor fails to pay. Factoring with recourse basis is a transfer of
financial asset wherein the transferor neither transfer nor retains substantially all
the risks and rewards of ownership of the financial asset.
Factor’s holdback
This is a certain percentage of the transferred receivables retained by the factor
to serve as a cushion to for sales return and allowances. The transfer or records
such amount under the “Factor’s holdback or “Receivable from factor” account.
The factor returns the holdback to the transferor when the receivables are fully
collected or when there are no further sales returns and discounts expected.
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Commissions and interest charges
The factor normally charges the transferor of a certain percentage of the
receivables factored as a service fee or commission. Furthermore, interest is
computed on a weighted average time to maturity of the receivables may also be
charged.
Accounting for commissions and interest charges
Factoring may take the form of the following:
1. Casual Factoring – if the factoring is an isolated event or made on a casual
basis, the transfer or record the fees and interest charges as loss on sale of
receivables.
2. Factoring as a regular means of financing- services are recorded as regular
expenses.
Illustration: without recourse

An entity factored accounts receivable of P500,000 on a without course basis on
April 1, 2021. The factor charged 5% service fee and retained 20% of the amount
of the receivables factored to cover the sales return and allowances. The factor
also charged 12% interest computed on a weighted average time to maturity of
receivables of 80 days based on 365 days.
Requirements:
(1) Proceeds from the factoring
(2) Journal entries to record the factoring assuming it was made on (a) on a
casual basis (b) regular means of financing
(3) Cost of factoring.
SOLUTION
1. Proceed from factoring
Accounts receivable factored P500,000
Service charge (500,000 x 5%) (25,000)
Factor’s holdback (20% x 500,000) (100,000)
Interest charged (500,000 x 12% x 73/365) (12,000)
Proceeds from factoring P463,000
2. Journal Entries
(a) Casual basis

Cash 463,000
Receivable from factor 100,000
Loss on sale of receivables 37,000
Accounts receivable 500,000
(b) Regular means of financing

Cash 463,000
Service charge 25,000
Interest expense 12,000
3. Cost of factoring
20
(a) Casual basis (b) Regular means of financing
Loss on sale of A/R 37,000 Service charge 25,000
Cost of factoring 37,000 Cost of factoring 37,000
Illustration: with recourse

Assuming in the previous illustration the entity factored the receivables on a with
recourse basis. The entity determines that the recourse obligation has a fair value
of P15,000.
Requirements:
(1) Proceeds from the factoring
(2) Journal entries to record the factoring assuming it was made on (a) on a
casual basis (b) regular means of financing
(3) Cost of factoring.
1. Proceed from factoring
Accounts receivable factored P500,000

Service charge (500,000 x 5%) (25,000)
Factor’s holdback (20% x 500,000) (100,000)
Interest charged (500,000 x 12% x 73/365) (12,000)
Proceeds from factoring P463,000
2. Journal Entries
a) Casual basis
Cash 463,000
Loss on sale of receivables 52,000
Liability for recourse obligation 15,000
(b) Regular means of financing

Cash 463,000
Loss on recourse obligation 15,000
Liability for recourse obligation 15,000
3. Cost of factoring:
(a) If all receivables are collected
Cost of factoring 37,000
21
(b) If not all the receivables are collected
Recourse obligation 15,000 References:
Cost of factoring 52,000  Millan, Z. V. (2020) Intermediate
Accounting Volume 1A, Baguio City:
Manila
Assessment
IDENTIFICATION. 12 pts.
1. In this arrangement, the factor assumes the risk of uncollectability and absorbs
any credit losses. Transferor is not held liable in case the debtor fails to pay.
2. In this arrangement, the transferor guarantees payment to the factor in the event
that the debtor fails to pay. The transferor is held liable up to the guaranteed amount
in case the debtor fails to pay.
3. This is a certain percentage of the transferred receivables retained by the factor to
serve as a cushion to for sales return and allowances.
4. The factor normally charges the transferor of a certain percentage of the
receivables factored as a __________.
5. A form of factoring when there is an isolated event or made on a casual
basis, the transfer or record the fees and interest charges as loss on sale of
receivables.
6. A form of factoring when services are recorded as regular expenses.

For Items 1-2. 4 pts.
Zeus Company factored P6,000,000 of accounts receivable to a finance entity at the
end of current year. Control was surrendered by Zeus Company.
The factor assessed a fee of 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
22
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
For Items 3-4. 4 pts.

Cynthia Company factored P750,000 of accounts receivable at year-end. Control
was surrendered. The factor accepted the accounts receivable subject to recourse
for nonpayment. The fair value of the recourse 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 charged 12% interest computed on a weighted-average time to
maturity of 51 days.
3. What is the amount of cash initially received from the factoring?
a. 692,425
b. 720,000
c. 722,425
d. 705,000
4. What total amount should be recognized initially as loss on factoring the
accounts receivable?
a. 12,575
b. 15,000
c. 27,575
d. 47,575
23
Suggested Answers:
IDENTIFICATION. 12 pts.
1. Factoring without recourse
2. Factoring with recourse
3. Factor’s holdback
4. Commissions and interest charges
5. Casual factoring
6. Factoring as a regular means of financing

FOR ITEMS 1-2. 4 PTS.
1. B - 5,386,850
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 5,396,850
2. A - 313,150
Factoring fee 180,000
Interest 133,150
Total cost of factoring 313,150
FOR ITEMS 3-4. 4 PTS.

3. A - 692,425
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 from factoring initially received 692,425
Note that if the interest is based on weighted average time, the denominator is 365
days. Otherwise, the denominator is 360 days in the absence of contrary statement.
4. D - 27,575
Factoring fee 15,000
Interest 12,575
Recourse obligation 20,000
24
Total loss on factoring initially recognized 47,575
SUMMARY
 Receivable financing is the financial flexibility or capability of an entity to raise money out
of its receivables.
 Most Common Forms of Receivable Financing Used in Practice:
 Pledging of accounts receivable
 Assignment of accounts receivable
 Factoring of accounts receivable
 Discounting of notes receivable
 Pledging of accounts receivable is usually made when obtaining loans from banks or any
other lending institution. The pledged receivables shall serve as a collateral security for
the payment of the loan.
 Accounting Treatment
 Doesn’t require necessary entry in the books. Disclosure of such transaction in the
financial statements is enough.
 Accounting for the loan is done in usual manner as any other loans.
 Assignment of accounts receivable
 evidenced by a financing agreement and a promissory note both of which the assignor
signs
 specific accounts receivable serve as a collateral security
 The assignee usually only lends a certain amount in consideration for the assigned
accounts in order to protect itself from factors that may lead for the assigned accounts to
be not fully realized such as sales discounts, sales returns and allowances and
uncollectible amounts
 Service or financing fee is also charge by the assignee for the assignment agreement.
 Notification basis
 the customers are informed that their accounts had been assigned and therefore make
their payments to the assignee directly.
 Non-notification basis
 customers are not informed of the assignment of accounts receivable and therefore still
make their payment to the assignor
 Accounting Treatment for Assignment of accounts receivable
 The entry to record the assignment under both bases involves reclassification of accounts
receivable to accounts receivable-assigned.
 Presentation
 The accounts receivable assigned is included in the carrying amount of accounts
receivable but disclosure is necessary.
 Factoring is a sale of accounts receivable, thus, ownership of accounts is transferred.
Note: The new owner of the accounts receivable which is usually a bank or finance, also called the factor, assumes full responsibility over the
collection of accounts including risks of non-collection.
 Forms of Factoring
a. Casual factoring
 Recorded as normal sale
 Recognition of loss on factoring
b. Factoring as a continuing agreement
 Recorded as normal sale
 Recognition of loss on factoring (Factoring fee or commission)
 Provision of factor’s holdback*
Note: *a predetermined amount for protection against customer returns and allowances and other special adjustments. Factor’s holdback is
actually a receivable from factor and classified as a current asset.
25
 Presentation for Factored Accounts Receivable. Excluded from total accounts receivable.
(derecognized)
26

Final SLP Accounting For Receivables

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Final SLP Accounting For Receivables

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INTERMEDIATE ACCOUNTING 1, PART 2 (AE 15a)

CHAPTER 8 – ACCOUNTS RECEIVABLE

Accounts Receivable Financing

The need to Accounts Receivable Financing

Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable

Structuring: as asset sale vs. as loan agreement

 Common forms of receivable financing

Forms of Receivable Financing

Illustration: Pledging of Accounts Receivable

Dec. 31 Interest Expense (P120,000 x 3/12) P30,000

STATEMENT OF COMPREHENSIVE INCOME

PROBLEM SOLVING. 2 items, 5 pts. each

Item #2. 5 pts.

PROBLEM SOLVING. 2 items, 5 pts. each

 Assignment of accounts receivable

Assignment of Accounts Receivable

Journal Entries: non-notification vs notification

The amount to be transferred to unassigned accounts may be computed as follows:

Total accounts receivable - assigned XX

Illustration – nonnotification basis

Non- notification Notification

August collection by bank 300,000

MULTIPLE CHOICE – PROBLEMS. 4 pts.

For items 2-4. 3 pts

Item #3. C - 1,130,000

Face amount of accounts collected 2,000,000

Factoring without recourse

Factoring with recourse

Illustration: without recourse

(a) Casual basis

(b) Regular means of financing

Illustration: with recourse

1. Proceed from factoring

Accounts receivable factored P500,000

(b) Regular means of financing

MULTIPLE CHOICE – PROBLEMS. 8 pts.

For Items 3-4. 4 pts.

MULTIPLE CHOICE – PROBLEMS. 8 pts.

FOR ITEMS 3-4. 4 PTS.

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