CHAPTER 7: LOAN RECEIVABLE

1. Define loan receivable

- it is an asset where money lended to a borrower or client from a bank or other financial
institution. It can be short-term but it is normally long-term as it can be paid for several years.
2. Explain initial measurement of loan receivable
- It is measured initially at fair value plus the transaction costs as for its acquisition. The
transaction costs include the direct origination costs.
3. Explain subsequent measurement of loan receivable
- If on subsequent measurement, it is recorded at amortized cost using effective interest
method.
4. What is the meaning of amortized cost in relation to loan receivable.
- for amortization cost, if initial amount is lower than principal amount, amortization of
difference is added to carrying amount. Then if it is higher, the difference is deducted to
carrying amount.
- Loan receivable is measured initially for minus principal repayment, plus or minus cumulative
amortization of any difference between carrying amount and principal maturity amount, and
minus reduction for impairment or uncollectibility.
5. What is the origination of fees in relation to loan?
- are fees charged by bank to borrower for the creation of the loan. It includes compensation
for Evaluating borrower’s financial condition, Evaluating guarantees, collateral and other
security, Negotiate terms of loan, Preparing and processing of documents related to loan, and
Closing and approving of the loan transaction.
6. Explain acounting for origination fees
- It is recognized as “unearned interest income “ and amortized over the term of the loan.
7. Explain direct origination costs
- origination fees are not chargeable to the borrower. It is deferred and amortized over the
term of loan. It is directly offset to the unearned origination fees received or the “unearned
interest income “.
8. Explain treatment of origination fees from borrower and direct origination costs incurred
by the lender.
- If origination fees received from borrower exceeds direct origination costs, unearned interest
income and amortization will increase interest income, and vice versa.
- Origination fees received and direct orignation costs are included in the measurement of loan.
9. Explain treatment of indirect origination costs
- It is treated as an outright expense as it is related but not directly attributable to the
acquisition of the asset.
10. Explain measurement of impairment loan
- It is the recognition of allowance for expected credit losses on financial asset measured at
amortized cost. Evidences for impairment are financial difficulty of borrower, breach of contract
such as default or delinquency in interest or principal payments, debt restructuring or change in
contract, borrower entered bankcruptcy or other reorganization, disappearance of active
market for trading of receivable, and measurable decrease in estimated future cashflows from
financial asset.
- It shall measure the loss allowance for financial instrument at an amount equal to lifetime
expected credit losses if credit risk has increased since initial recognition.
- it is measured at difference between carrying amount and present value of estimated future
cash flows discounted at the original effective rate.
11. What is the computation of carrying amount of the loan receivable subsequent to
impairment?
- Carrying amount of loan receivable shall be reduced either directly or through allowance
account.
12. Explain the meaning of credit risk.
- It is the risk for financial loss as the borrower will not be able to pay the creditor for the
obligation. It depends if the borrower has a collateral which the collateralized asset of borrower
will pay the obligation.
13. Define credit loss.
- are present value or discounted value of all cash shortfalls. Expected credit losses are an
estimate of credit losses over the life of financial instrument.
14. Distinguish 12-month expected credit loss and lifetime expected credit loss.
- The lifetime expected credit loss differs with the 12-month expected credit loss is that it is
expecting credit loss that results from all default events over the whole life of the instrument.
Lifetime expected credit loss shall always be recognized for trade receivables through aging,
percentage of accounts receivable, and percentage of sale.
15. Explain three-stage approach of loan impairment.
 Stage 1 (Low Credit Risk) – covers debt instruments not declined in credit quality since initial
recognition or that has low credit. It recognizes the 12-month expected credit loss where the
credit risk here is low as it is short term. Borrower is still able to pay for the loan.
Stage 2 (Significant increase in credit risk but no objective evidence of impairment) -
covers debt instruments that have declined in credit quality since initial recognition but do not
have objective evidence of impairment. It recognizes life expected credit loss. Rebutable
presumption that there is increase in credit risk if contractual payments are more than 30 days
past due or meaning it is underperforming.
Stage 3 (Objective evidence of impairment) – covers debt instruments that have objective
evidence of impairment at reporting date. Under this is recognizing lifetime expected credit
loss.
Under stages 1 and 2, interest is computed based on gross carrying amount or face value. While
on stage 3, interest income is computed based on net carrying amount which is equal to face
amount minus allowance for loan impairment. All stages uses effective interst rate.

CHAPTER 8: RECEIVABLE FINANCING

1. Explain fully receivable financing.
- it is the financial flexibility or capability of entity to raise money out of its receivables.
2. Enumerate four common forms of receivable financing.
- The four common forms of receivable financing are pledge, assignment, factoring of accounts
receivable, and discounting of notes receivable.
3. What are the forms of financing related to accounts receivable?
- The forms of financing related to accounts receivable are pledge, assignment, and factoring of
accounts receivable.
4. What is pledge of accounts receivable?
- It is the accounts receivable to be pledged as collateral security for the payment of loan to
any of lending institutions including the bank.
- Loan is recorded by debit cash and discount on note payable if loan is discounted, and credit
notes payable. Subsequent payment of loan is recorded by debiting notes payable and credit
cash. No entry for pledge accounts is needed, it is disclosed on the notes on financial statement.
Using straight line method, discount is amortized and recorded as interest expense to be
debited and credit the discount for the months past.
5. What is assignment of accounts receivable?
 - it is formal pledging of accounts receivable where borrower transfers rights in some accounts
receivable to the lender for the consideration of loan. Specific accounts receivable is collateral
security for the loan. The assignee lends the borrower at a certain percentage of the face value
of accounts assigned as it could not be fully realized by reason of sales discount, sales return,
and uncollectibility and the percentage could be 70,80, or 90% depending on quality of
accounts.
- Assignee usually charges interest for loan and require service or financing charge or
commission for assignment and agreement.
6. Distinguish pledge and assignment of accounts receivable.
- Assignment of accounts receivable differs in a way that it is a more formal pledging of
accounts as it transfers rights in a specific accounts receivable and assigns as notification or
non-notification basis. The borrowing is evidenced by financing agreement and a promissory
note. It assigns certain percentage as receivable could not be fully received because of sales
returns or discounts and uncollectibility.
7. What is the meaning of non-notification and notification basis with respect to assignment
of accounts receivable?
- It can either be assigned on non-notification or notification basis. On non-notifiaction,
customers are required to pay to the assignor and will remit collection to assignee. While on
notification basis, the customers are informed and will directly pay to the assignee.
8. What is factoring?
- It is the sale of accounts receivable to the financing entity called factor without recourse and
is a notification basis. It transfers the ownership to the factor and is reponsible for the
uncollectible accounts and keeping the receivable records and collecting accounts.
- gain or loss is recognized by the difference of received and net carrying amount of receivables
factored. If there is a recourse, it is initially recorded as loss on factoring (loss on recourse
obligation) and its final settlement is deducted to Factor’s holdback.
9. Explain casual factoring and factoring as a continuing agreement.
Casual Factoring – if the entity is in critical cash position, they may be forced to factor some
or all of its A/R at substantial discount to a bank to obtain needed cash.
Factoring as Continuing Agreement – finance entity purchases all of A/R of a certain entity
where before merchandise is shipped to a customer, selling entity requests lender’s approval for
credit. If approved, account is sold immediately to the factor after shipment of goods and factor
assumes credit and collection function.
 - For compensation, factor charges a commission or factoring fee of 5% to 20% for its
services of credit approval, billing, collecting, and assuming of uncollectible factored accounts.
- Factor may withhold an amount as protection against customer returns and allowances
and other special adjustments, this is known as “Factor’s holdback” and is a receivable and
current asset. Final settlement of holdback is after factored receivables fully collected.
10. What is a credit card?
- is plastic card that enables holder to obtain credit up to predetermined limit from issuer of
card for purchase of goods or services, mostly, it is offered to their depositors. Holder obtain
goods or services but do not have to pay for one month. It has a service fee of 1% to 5% of
credit card sales.
- When customer bought goods and used credit card, receipt must be forwarded by retailer to
card issuer who will then pay retailer the appropriate amount minus service charge.

CHAPTER 9: RECEIVABLE FINANCING (Discounting of Note Receivable)

1. Explain discounting of note receivable.
- sale of note to a third party, usually bank. The sale is with recourse basis which means that
upon default of debtor, seller of note becomes liable for maturity value.
2. Who are the original parties in promissory notes?
- The maker and the payee of the notes payable/receivable. It is where maker is liable and
payee is the endorser which maker is entitled to pay on date of maturity.
3. Who are the parties involved after discounting of note receivable?
- The payee or the endorser and the bank or the endorsee are involved. ????
4. Explain endorsement of a negotiable instrument.
- It is the secondary liability of endorser where there is a transfer of right by signing at the back
of instrument. It may be with recourse which means that endorser shall pay endorsee if maker
dishonors notes, or without recourse that endorsee avoids future liability even maker refuse to
pay endorsee on date of maturity. If it is silent, then it is assumed to be with recourse.
5. What is the formula in computing net proceeds from discounting of note receivable?
- It refers to the discounted value of notes received by endorser from endorsee. The formula is
Net proceeds = Maturity value – discount.
6. Explain maturity value.
 - is the amount due on the note at date of maturity. Principal amount or face value is the
appeared amount on note. Maturity Value = principal amount + interest
7. What is the formula in computing interest on note receivable?
- It is the amount of interest for full term of note.Time is the period from date of note to
maturity. The formula is Interest = Principal x Interest Rate x Time
8. Explain discount in relation to discounting of note receivable.
- it is the amount of interest deducted by bank in advance to get the net proceeds from
discounting later and compute for gain or loss on note discounting. It is the remaining term of
the note on the date of discounting.
9. What is the formula in computing discount?
- Discount = Maturity Value x Discount Rate x Discount Period
10. Explain the carrying amount of the note receivable upon discounting.
- It is the face amount to the date of discounting for the endorser to sell it to the endorsee. To
get carrying amount, Carrying Amount = Principal + Accrued Interest Receivable.
11. What is the formula in computing gain or loss on discounting of note receivable?
- Gain/Loss = Net Proceeds - Carrying Amount
12. Explain discounting without recourse.
- means that endorser avoids future liability even maker refuses to pay endorsee on date of
maturity. Sale of note receivable is absolute which is there is no contingent liability where N/R is
credited directly along with the interest income on the date of discounting.
13. Explain discounting with recourse accounted for as conditional sale.
- a contingent liability is recognized. If borrower will not pay then the payee will pay. Notes
receivable discounted is deducted from total notes receivable when preparing statement of
financial position with disclosure of contingent liability which will equal to 0 amount of
receivable.
14. Explain discounting with recourse accounted for as secured borrowing.
- notes receivable is not derecognized but liability is recorded at an amount equal to face
amount of N/R discounted. Interest expense is netted against interest income as discounting
transaction is a borrowing. There is no gain/loss on this manner.
15. What are the criteria for derecognition of financial asset?
 - Entity shall derecognize a financial asset either “Contractual rights to the cash flows of
financial asset have expired”, or “Financial asset has been transferred” and the transfer qualifies
for derecognition based on extent of transfer of risks and rewards of ownership.
Contractual rights to the cash flows of financial asset have expired - applied when N/R from
customer is fully collected.
Financial asset has been transferred - relies on assessment of extent of transfer risks and
rewards of ownership.
1. If entity transferred all risks and rewards, financial asset shall be derecognized.
2. If entity retained all risks and rewards, financial asset shall not derecognized.
3. If entity either of the two above, derecognition depends on whether entity has retained
control of asset.
a. If entity lost control, financial asset is derecognized entirety.
b. If has retained control, not derecognized.