CHAPTER 9

1. Explain discounting of notes receivable.

Discounting of notes receivable refers to a financing arrangement wherein an entity
endorses its promissory note at a discount to the bank or other entity prior to its maturity
date to obtain cash.
2. Who are the original parties in a promissory note?
The original parties in a promissory note are the maker, the one liable, and the payee,
to whom the payment is to be made on the maturity date.
3. Who are the parties involved after discounting of note receivable?
The endorser (payee) and the endorsee (bank) are the parties involved after
discounting of notes receivable.
4. Explain the endorsement of a negotiable instrument
An endorsement is a signature or a series of signatures on the back of a negotiable
instrument that transfers ownership rights from the endorser to the endorsee. It can be
with course or without recourse. In legal parlance is a secondary liability of the endorser
while in accounting parlance, it is a contingent liability of the endorser.
5. What is the formula for computing net proceeds from discounting of notes
Receivable?
Net proceeds are computed by subtracting the discount from the maturity value.
6. Explain maturity value.
Maturity value is the total amount of money that will be received by the holder of the
note at the date of maturity. It is computed by adding the principal amount and interest.
7. What is the formula for computing interest on the note receivable?
Interest on the note receivable is computed by multiplying principal, times interest rate
times time.
8. Explain the discount in relation to discounting notes receivable.
Discount is the amount of interest deducted by the bank in advance.
9. What is the formula for computing discount?
Discount is computed by maturity value times discount rate times discount period.
10. Explain the carrying amount of the note receivable upon discounting.
The carrying amount of the note receivable upon discounting is computed by accrued
interest receivable added to the note’s principal amount. Accrued interest receivable is
the amount of interest earned from the date of issuance up to the date of discounting, it
is computed by principal times interest rate times time.
11. What is the formula for computing gain or loss on discounting of Note
receivable?
Gain or loss on discounting of notes receivable is computed by the difference between
the net proceeds from discounting and the carrying amount of the note receivable.
12. Explain Discounting without recourse.
If the discounting is without recourse, the sale of note is absolute and therefore no
contingent liability. The note receivable is credited directly, and interest income is also
credited for the interest earned on the date of discounting.
13. Explain discounting with recourse accounted for as Conditional Sale.
A contingent liability is recognized in discounting with recourse accounted for as a
conditional sale.
When creating the statement of financial position with disclosure of the contingent
liability, the discounted account for notes receivable is subtracted from the total amount
of notes receivable.
14. Explain discounting with the recourse accounted for a secured borrowing.
In discounting with the recourse accounted for a secured borrowing, the note receivable
is not derecognized but instead, an accounting liability is recorded at an amount equal
to the face amount of the note receivable discounted.
The accounting treatment for this type of discounting involves recording the proceeds
from the sale of the notes receivable as a secured borrowing and recognizing the
interest expense over the term of the loan.
And there is no gain or loss

The note receivable is not derecognized when a secured loan is discounted with
recourse accounting; instead, an accounting liability equal to the face amount of the
discounted note receivable is recorded.
The accounting method for this kind of discounting entails recognizing interest expense
during the course of the loan and recognizing the proceeds from the sale of the
receivables as a secured borrowing.
There is also no gain or loss.
15. What are the criteria for the derecognition of A financial asset?

 The contractual rights to the cash flows of the financial asset have expired.
  The financial asset has been transferred and the transfer qualifies for
derecognition based on the extent of the transfer of risks and rewards of
ownership.
GUIDELINES:
The financial asset shall be derecognized if the entity has transferred
substantially all risk and rewards.
If the entity has retained substantially all risks and rewards, the financial asset
shall not be recognized.
If the entity has neither transferred nor retained substantially all risks and
rewards, derecognition depends on whether the entity has retained control of the
asset.
a. If the entity has lost control of the asset, the financial asset is derecognized
in its entirely.
b. If the entity has retained control over the asset, the financial asset is not
derecognized.