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Intermediate
Accounting 1
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Receivable
Discounting
by: Prof. Ernie D. Tano, CPA, MBA
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Discounting is the receivable

financing specifically for Notes
Receivable
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When a note is negotiable, the payee

may obtain cash before maturity date
by discounting the note at a bank of
other financing company
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Terms related to discount of note

Description Formula
Net Proceeds The discounted value of the note Maturity Value - Discount
received
Maturity Value The amount due on the note Principal + Interest
Maturity Date The date note should be paid
Principal The face value
Interest Interest for full term of note Principal x rate x time
Interest rate Rate appearing on the note
Time From date of note to maturity date
Discount Interest deducted in advance by the Maturity Value x Discount
bank Rate x Discount period
Discount rate Interest used by the bank to discount
Discount period Discounting date to maturity date Maturity date – discounting
date
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Discounting without recourse

Illustration:
A P1,000,000, 180-day, 12% note dated July 1 was received from a customer and
discounted without recourse on August 30 at 15% discount rate
Computation

Maturity value which is equal to the principal plus interest.

Principal 1,000,000
Interest (1,000,000 x 12% x 180/360) 60,000
Maturity Value 1,060,000

Observe that the interest must be for the “full term” of the note in determining the maturity
value.
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Discounting without recourse

Discount which is equal to the “maturity value times discount rate times discount period”.

Discount (1,060,000 x 15% x 120 / 360) 53,000

The discount period is the remaining term of the note on the date of discounting

Term of note 180 days

Less: Days expired from July 1 to August 30 60 days
Discount period-remaining term 120 days

In counting, “exclude the first day but include the last day.”
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Discounting without recourse

Net proceeds from discounting

Maturity value 1,060,000

Discount ( 53,000)
Net proceeds 1,007,000

Carrying amount of the note receivable

Principal 1,000,000
Accrued interest receivable (1,000,000 x 12% x 60 / 360) 20,000
Carrying amount of note receivable 1,020,000

The accrued interest receivable is interest earned from July 1 to the date of discounting on
August 30, or 60 days.
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Discounting without recourse

Gain or loss on note discounting

Net proceeds 1,007,000

Carrying amount of note receivable 1,020,000
Loss on note discounting ( 13,000)

The difference between the net proceeds from discounting and the carrying amount of the
note receivable is recognized as gain or loss.
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Discounting without recourse

Discount for note receivable discounting
The accounting for note receivable discounting depends on whether the discounting is
with or without recourse.

Journal entry
Cash 1,007,000
Loss on note receivable 13,000
Note receivable 1,000,000
Interest income 20,000

The note receivable account is credited directly because the sale of the note receivable is
without recourse or absolute.

The interest income is credited for the actual interest earned on the date of discounting
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Discounting with recourse

Illustration:
A P2,400,000, 6-month, 12% note dated February 1 is received from a customer by an
entity and discounted by First Bank on March 1 at 15%.

Principal 2,400,000
Interest (2,400,000 x 12% x 6/12) 144,000
Maturity Value 2,544,000
Discount (2,544,000 x 15% x 5/12) (159,000)
Net proceeds 2,385,000

Term of note 6 months

Less: Age of note (Feb. 1 to Mar. 1) 1 month
Discount period 5 months
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Discounting with recourse

Principal 2,400,000
Accrued interest receivable (2,400,000 x 12% x 1/12) 24,000
Carrying amount of note receivable 2,424,000

The accrued interest receivable is for one month from February 1 to the date of
discounting on March 1
Net proceeds 2,385,000
Carrying amount of note receivable 2,424,000
Loss on note receivable discounting ( 39,000)
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Discounting with recourse

If the discounting is with recourse, the transaction is accounted for as either of the
following:

a. Conditional sale of note receivable recognizing a contingent liability

b. Secured borrowing
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Discounting with recourse

Conditional Sale Secured Borrowing
Journal Entry
Cash 2,385,000 Cash 2,385,000
Loss on NR discounting 39,000 Interest Expense 39,000
Note receivable 2,400,000 Note receivable 2,400,000
Interest income 24,000 Interest income 24,000
The note receivable discounted account is The note receivable is not derecognized but instead
deducted from the total notes receivable when an accounting liability is recorded at an amount
preparing the statement of financial position with equal to the face amount of the note receivable
disclosure of he contingent liability discounted.

There is no gain or loss on discounting if the note

receivable discounting is accounted for as secured
borrowing
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Discounting with recourse

Conditional Sale Secured Borrowing
Note is paid by maker on maturity
NR Discounting 2,400,000 Liab. for NR Discounting 2,400,000
Notes Receivable 2,400,000 Notes Receivable 2,400,000
Note is dishonored by the maker on August 1 and the entity pays the First bank the maturity value of the
note, P2,544,000 plus protest fee and other bank charges of P5,000
1. To record the payment to First Bank

Accounts Receivable 2,550,000 Accounts Receivable 2,550,000

Cash 2,550,000 Cash 2,550,000
2. To cancel the contingent liability 2.To derecognize the liability for note receivable
and not receivable

NR Discounting 2,400,000 Liab. for NR Discounting 2,400,000

Notes Receivable 2,400,000 Notes Receivable 2,400,000
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End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition
by: Zeus Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:

Conrado T. Valix, et.al