RECEIVABLE FINANCING
 Accelerating the collection of receivables either by using accounts
receivable as a loan collateral, selling the receivables without recourse
and discounting of notes receivable.
 The use of receivables as a loan collateral can either be designated as a
pledging of accounts receivable or an assignment of accounts
receivables.
Forms of Receivable Financing:
✓ Pledging
✓ Assignment
✓ Factoring
✓ Discounting
PLEDGING
 Refers to the use of receivables as collateral for a loan.
 The only entry required in the books would record the loan obtained
from the finance company or bank.
 The accounts receivable, in any manner, is not affected by the pledging.
The accounts receivable is accounted for normally and are not
reclassified.
 However, disclosures should be made in the notes to financial
statements.
ASSIGNMENT
 A more formal borrowing arrangement in which the receivables are used as
security.
 The borrower (assignor) assigns the receivables to a lender (assignee) and
signs a promissory note.
 A reclassification is made on the assigned accounts.
 The “equity in the assigned accounts” is the difference between the balance
of the assigned accounts and the balance of the loan. Disclosure of this
account is required.
 Assignment may be done on a notification or non- notification basis.
FACTORING
 A sale of receivables since the transfer of these receivables is without
recourse.
 The factor company (finance company) assumes the risk of collection
and generally handles the billing and collection function.
 As in any sale of assets, a gain or loss is recognized for the difference
between the proceeds received and the net carrying amount of the
receivables factored.
 Factoring can either be a “casual factoring” transaction or “factoring as a
continuing agreement”.
 Casual factoring is a sale of the receivables at a discount.
This is similar to any type of sale of an asset in order to generate cash
quickly. However, the sale is always made below the carrying amount or
the net realizable value of the accounts receivable and therefore a loss
shall be recognized as follows:
 Factoring as a continuing agreement involves the sale of accounts
receivable to a financing entity on a long term basis and where the buyer
is committed to buy the receivables before the actual goods are sold to
the customers on credit. In other words, the collection and credit
responsibilities are surrendered to the buyer as soon as goods are
delivered to the customers. The
following items shall be deducted from the face value of the receivables:
 Both the service fee and interest shall be recognized as an expense,
meanwhile the factor’s holdback is a receivable and a value where the
factor shall deduct the sales discounts and sales returns taken by the
seller’s customers before finally remitting to the seller the balance when
all of the accounts receivable is collected.
DISCOUNTING
 In essence, selling the note to the bank with recourse.
 Discounting of notes receivable that is with recourse and on a
notification basis shall involve the following computation:
 The discount rate shall be determined by the bank buying the note,
however if there is no discount rate provided, the same rate on the note
shall be used as the discount rate. The remaining term is also known as
the “discount period”.
 The total receivable shall also be computed on the date of the
discounting which is the face value plus the accrued interest from the
date of the note. This amount shall then be compared with the proceeds
of the discounting and a “loss” shall be recognized for the difference.
 Journal Entries Related to the Discounting of Notes Receivable Under
Conditional Sale:
 Journal Entries Related to the Discounting of Notes Receivable Under
Secured Borrowing:
 The note receivable discounted account is credited rather than writing
off the notes receivable account because of the contingent liability
feature of the discounting transaction. However, this account shall be a
contra-asset account and deducted from the total notes receivable to be
presented in the statement of financial position.
- - END - -
RECEIVABLE FINANCING
THEORY
1. Which of the following is a method to generate cash from accounts
receivable?
a. Assignment only c. Both A and B
b. Factoring only d. Neither A nor B
2. The equity of the assignor in assigned accounts is equal to
a. assigned accounts receivable
b. bank loan balance
c. assigned accounts receivable minus the bank loan balance
d. bank loan balance minus the assigned accounts receivable
3. It is a predetermined amount withheld by a factor as a protection against
customer returns, allowances and other special adjustments
a. Equity in assigned accounts c. Commission
b. Service charge d. Factor’s holdback
4. Which of the following is true when accounts receivables are factored
without recourse?
a. The transaction may be accounted for either as secured borrowing or sale
b. The receivables are used as collateral for a promissory note issued to the
factor by the owner of the receivables
c. The factor assumes the risk of collectability and absorbs any credit losses in
collecting the receivables
d. The financing cost should be recognized ratably over the collection period b. P18,000 interest revenue d. P5,850 interest revenue
of the receivables
4. Jvion Company received from a customer a 1-year, P500,000 note bearing
5. If financial assets are exchanged for cash and other consideration but the annual interest of 8%. After holding the note for 6 months, it discounted the
transfer does not meet the criteria for a sale, the transferor and the transferee note at a nearby bank at an effective interest rate of 10%. What amount of
should account for transaction as cash did it received from the bank?
I. Secured borrowing a. P540,000 c. P513,000
II. Pledge of collateral b. P523,810 d. P495,238
a. I only c. Both I and II
b. II only d. Neither I nor II 5. Mamelia Company accepted from a customer a P4,000,000, 90-day, 12%
interest bearing note dated August 31, 2021. On September 30, 2021, it
discounted the note with recourse at Sea Bank at 15%. However, the proceeds
6. If receivables are hypothecated (pledged) against borrowings, the amount of
were not received until October 1, 2021. The discounting with recourse is
receivables involved should be
accounted for as a conditional sale with recognition of a contingent liability.
a. Disclosed in the notes
What is the loss on note receivable discounting?
b. Excluded from the total receivables, with disclosure
a. P40,000 c. P17,000
c. Excluded from the total receivables, with no disclosure
b. P23,000 d. P20,000
d. Excluded from the total receivables and a gain or loss is recognized
between the face value and the amount of borrowings
ILLUSTRATIVE EXAMPLES
7. Notes receivable discounted with recourse should be
Pledging
a. Included in total receivables with disclosure of contingent liability
1. Pinnacle Company provided the following information in connection with
b. Included in total receivables without disclosure of contingent liability
a bank loan:
c. Excluded from total receivables with disclosure of contingent liability
March 1 Pinnacle borrowed P2,000,0000 from bank on a six-month note
d. Excluded from total receivables without disclosure of contingent liability
carrying an interest of 12% per annum. Accounts of P3,000,000 are
pledged to secure the loan.
8. After being held for 60 days, a 120-day 8% interest-bearing note receivable
April 1 Pledged accounts of P1,000,000 are collected minus 2% discount.
was discounted at a bank at 12%. The amount received from the bank is equal
June 1 The remaining pledged accounts are collected.
to
September 1 The bank loan is repaid plus interest.
a. Face value less discount rate at 8%
Requirement: Prepare journal entries to record the transactions.
b. Face value less discount rate at 12%
c. Maturity value less discount at 8%
Assignment
d. Maturity value less discount at 12%
2. Mr. Accounting Company provided the following transactions:
May 1 Mr. Accounting assigned P800,000 of accounts receivable to a
9. If a note receivable is discounted without recourse
bank in consideration for a loan. A cash advance of 80% less
a. The contingent liability may be disclosed in either a contra account to note
service charge of P20,000 was made by the latter. It was agreed
receivable or in a note to the financial statements
that interest of 2% per month is to be made and that the assignor
b. Liability for note receivable discounted should be credited
continues to make the collections. The entity signed a promissory
c. Note receivable should be credited
note for the loan.
d. The transaction should be accounted for as a borrowing as opposed to a sale
5 The entity issued a credit memo to a customer for returned
merchandise, P30,000. The account is one of the assigned
PROBLEMS
accounts.
1. On January 1, Deliela Company assigned P500,000 of accounts receivable
10 Collections of P500,000 of the assigned accounts were made, less
to X Finance Inc. The company gave a 14% note for P450,000 representing
2% discount.
90% of the assigned accounts and received
June 1 Remitted the collections to the bank plus 2% interest for one
proceeds of P432,000 after deduction of a 4% fee. On February 1, it remitted
month.
P80,000 to X, including interest for 1 month on the unpaid balance. As a result
7 Assigned accounts of P10,000 proved to be worthless.
of this P80,000 remittance, accounts receivable assigned and notes payable
20 Collections of P200,000 for the accounts assigned were made.
will be decreased by what amount?
July 1 Final settlement was made with the bank. Mr. Accounting
Accounts receivable Notes payable
accordingly remitted the total amount due the bank to pay off the
a. P80,000 P74,750
loan plus interest charge.
b. P80,000 P80,000
Requirement: Prepare journal entries to record the transactions.
c. P72,000 P74,750
d. P74,750 P80,000
3. ABC Company assigned certain accounts receivable to a bank for a loan
on the following basis: 75% cash advance, 4% service charge on gross
2. Shiella Corporation factored P6,000,000 of accounts receivable to X
accounts assigned, 2% interest per month is to be charged, and the bank makes
Enterprises on October 1, 2021. Control was surrendered by the corporation.
the collections. The entity signed a promissory note for the loan.
X accepted the receivables subject to recourse for nonpayment. X assessed a
July 1 Received remittance upon the specific assignment of P1,500,000 in
fee of 3% and retains a holdback equal to 5% of the accounts receivable. In
accounts to the bank.
addition, X charged 15% interest computed on a weighted-average time to
August 1 Received notice from bank that P800,000 of the assigned accounts
maturity of the receivables of 54 days. The fair value of the recourse
were collected. A check was sent to the bank for one month interest
obligation is P90,000.
charge.
Sept. 1 Received notice from bank that assigned accounts of P500,000
Question 1: The corporation will receive and record cash of:
were collected in full and the remaining accounts of P200,000 were
a. P5,296,850 c. P5,476,850
being returned. Accordingly, a check was received from the bank
b. P5,386,850 d. P5,556,850
in settlement of the assignment contract. In making the settlement,
the bank deducted the interest charge for the corresponding period.
Question 2: Assuming all receivables are collected, the corporation’s cost of
Requirement: Prepare journal entries on the books of the assignor.
factoring the receivables would be:
a. P313,150 c. P433,150
4. On December 1, 2025, XYZ Company assigned specific accounts
b. P180,000 d. P613,150
receivable totaling P5,000,000 as collateral on a P4,000,000 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 assigned amounts.
3. Dan Corporation received a P300,000, 6-month, 12% interest bearing note
The December collections of assigned accounts receivable amounted to
from a customer. The note was discounted the same day by Sea Bank at 15%.
P2,000,000 less cash discount of P200,000. On December 31, 2025, the entity
As a result of the discounting, it should recognize:
remitted the collections on the bank in payment for the interest accrued on
a. P0 interest expense c. P5,850 interest expense
December 31, 2025 and the note payable.
The entity accepted sales returns of P100,000 on the assigned accounts and 9. On April 1, 2025, CPA Company discounted with recourse a 9-month,
wrote off assigned accounts of P300,000. 10% note dated January 1, 2025 with face value of P6,000,000. The bank
discount rate is 12%. The discounting transaction is accounted for as a
1. What amount of cash was received from the assignment of accounts conditional sale with recognition of contingent liability.
receivable on December 1, 2025? On October 1, 2025, the maker dishonored the note received. The entity paid
a. P4,000,000 the bank the maturity value of the note plus protest fee of P50,000.
b. P3,800,000 On December 31, 2025, the entity collected the dishonored note receivable in
c. P4,750,000 full plus 12% annual interest on the total amount due.
d. P3,750,000
1. What amount was received from the note receivable discounting on April 1,
2. What is the carrying amount of note payable on December 31, 2025? 2025?
a. P1,840,000 a. P6,063,000
b. P2,140,000 b. P6,450,000
c. P2,240,000 c. P6,048,000
d. P2,200,000 d. P5,963,000

3. What amount should be disclosed as the equity in assigned accounts on 2. What amount should be recognized as loss on note receivable discounting?
December 31, 2025? a. P450,000
a. P260,000 b. P387,000
b. P400,000 c. P87,000
c. P360,000 d. P63,000
d. P760,000
3. What is the total amount collected from the customer on December 31,
Factoring 2025?
5. Pinnacle Company sold accounts receivable without recourse with face a. P6,450,000
amount of P6,000,000. The factor charged 15% commission on all accounts b. P6,500,000
receivable factored and withheld 10% of the accounts factored as protection c. P6,695,000
against customer returns and other adjustments. d. P6,662,500
The entity had previously established an allowance for doubtful accounts of
P200,000 for these accounts. 4. If the discounting is secured borrowing, what is included in the journal
By year-end, the entity had collected the factor’s holdbacks there being no entry to record the transaction?
customer returns and other a. Debit loss on note receivable, discounting P87,000
adjustments. b. Debit interest expense P87,000
Requirement: Prepare journal entries to record the factoring and the c. Credit liability for note discounted P6,063,000
subsequent collection of the factor’s holdback. d. Credit interest income P63,000

6. XYZ Corp. factored P60,000 accounts receivable to ABC Financing Corp.

on January 1, 2025. ABC charged a 4% service fee and retained a 10%
holdback to cover expected sales returns.
In addition, ABC charged a 12% interest computed on a weighted average
time to maturity of the receivables of 73 days based on 365 days.
Requirements:
1. Assuming XYZ factored the receivables on a without recourse basis:
a. How much proceeds is received from factoring on January 1, 2025?
b. Provide the journal entries to record the factoring assuming the factoring is
made (a) on a casual basis and (b) as a regular means of financing.
c. How much is the cost of factoring?
2. Assuming XYZ factored the receivables on a with recourse basis and that
the recourse obligation has a fair value of P3,000:
a. How much proceeds is received from factoring on January 1, 2025?
b. Provide the journal entries to record the factoring assuming the factoring is
made (a) on a casual basis and (b) as a regular means of financing.
c. How much is the cost of factoring?

Discounting
7. ABC Company provided the following transactions:
January 1 The entity sold merchandise for P500,000 accepting a note of
P500,000 for six months with interest to be paid at maturity at
12%.
March 1 The entity discounted the note without recourse at the local bank at
15%.
July 1 The customer paid the bank in full.
Requirement: Prepare journal entries to record the transactions.

8. On January 1, 2025, Mr. Accounting Company sold land with carrying

amount of P1,500,000 in exchange for a 9-month, 10% note with face value of
P2,000,000. The 10% rate properly reflects the
time value of money for this type of note.
On April 1, 2025, the entity discounted the note with recourse. The bank
discount rate is 12%. The discounting transactions is accounted for as a
secured borrowing.
On October 1, 2025, the maker dishonored the note receivable. The entity paid
the bank the maturity value of the note plus protest fee of P10,000.
On December 31, 2025, the entity collected the dishonored note receivable in
full plus 12% annual interest on the total amount due.
Requirement: Prepare journal entries to record the transactions.