R EC EI V A B L E

FI NA N C I NG
SSIGNME NT, A ND FA C TO RING
PLEDGE, A
Receivable financing
- Financial flexibility or capability of an entity to
raise money out of its receivable
Pledging of Factoring of
Receivables Receivables

Assignment Discounting
of of
Receivable Receivables

Common Forms of
Receivable Financing
 LOANS

Collects the Receives the

pledged accounts collections as a
payment in
satisfaction of the
ACCOUNTS loan
RECEIVABLE

Pledge of Accounts
Receivable
 LOANS ACCOUNTS
RECEIVABLE
When the company made a loan from the bank:
Cash xx
Discount on note payable xx
NO ENTRY
Note payable – Bank xx

For subsequent payment of the loan: ONLY A DISCLOSURE IN

Note payable – Bank xx
NOTES TO FINANCIAL
Cash xx
Discount on note payable is amortized:
STATEMENT
Interest Expense xx
Discount on note payable xx

Pledge of Accounts Receivable

 Provided the following information in connection with a bank
loan.
March 1 Pittance Company borrowed P2,000,000 from a 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.
July 1 The remaining pledged accounts are collected.
Sept. 1 The bank loan is repaid plus interest.

REQUIRED:
Prepare journal entries to record the transactions.

Pittance Company
2015
Mar. 1 Cash 2,000,000
Note payable – bank 2,000,000

Apr. 1 Cash 980,000

Sales Discount 20,000
Accounts Receivable 1,000,000

Jun. 1 Cash 2,000,000

Accounts Receivable 2,000,000

Sept. 1Note payable – bank 2,000,000

Interest Expense 120,000
Cash 2,120,000
 Idealist Company secured a one-year bank loan of
P4,000,000 on October 1, 2015. The loan was discounted at
10%.
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 the loan up to the date of maturity.
2. Statement presentation of the bank loan with adequate
disclosure on December 31, 2015.

Idealist Company
Requirement 1:
2015
Oct. 1 Cash 3,600,000
Discount on note payable 400,000
Note payable – bank 4,000,000
Dec. 31 Interest Expense 100,000
Discount on note payable 100,000

2016
Oct. 1 Note payable – bank 4,000,000
Cash 4,000,000
Interest Expense 300,000
Discount on note payable 300,000
Requirement 2:
Idealist Company
Statement of Financial Position
As of the Year Ended 31 December, 2015

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Note payable – bank (Note 3) 4,000,000
Less: 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.

 In form:
SUBSTANCE Secured borrowing evidenced by a
OVER FORM financing agreement and a promissory
note both of which the assignor signs.

In substance:
Assignor transfers its rights in some of
its accounts receivable to an Assignee in
consideration for a loan.

Assignment of Accounts
Receivable
• Assignment may be done either:
Buyer is not informed of the
Non-notification basis
assignment and will continue to remit its payment to
the seller (assignor).

Buyer is informed of the assignment

Notification basis
arrangement and will remit payment directly to
the assignee
• Bank or a finance entity analyzes the borrower’s account
receivable.
• Assignee charges interest for the loan, and required a
service or financing charge or commission for the
assignment agreement.

Features of Assignment
• Loan is at a specified percentage of the face value of the
collateral and the interest and service fees are charged to
the assignor (borrower).

• Assigned accounts are segregated from other accounts.

The notes payable should be deducted from the balance
of Accounts Receivable assigned to determine the equity
in assigned accounts receivable.

Features of Assignment
 Non- notification Notification
Accounts Accounts
Receivable - Receivable -
To separate the assigned xx assigned xx
assigned
Accounts Accounts
accounts
Receivable xx Receivable xx
Cash xx Cash xx
Service Service
To record the Charge xx Charge xx
loan Notes payable - Notes
Bank payable -
xx Bank xx
Sales return xx Sales return xx
Issued credit
Accounts Accounts
memo (e.g. sales
Receivable - Receivable -
return) assigned xx assigned xx

Pro-forma journal entries:

Non-notification vs. Notification
 Non- notification Notification
Cash xx Note payable xx
- Bank
Sales xx Sales
Discount Discount xx
To record
collection Accounts Accounts
Receivable - Receivable -
assigned xx assigned xx
Notes Interest
payable - Expense
To record Bank xx xx
remittance Interest Cash
Expense xx xx
Cash xx

Pro-forma journal entries:

Non-notification vs. Notification
 Non- notification Notification
Allowance for Allowance for
Doubtful Doubtful
To record write- Accounts xx Accounts xx
off of accounts Accounts Accounts
assigned Receivable - Receivable
assigned xx - assigned xx
Accounts Accounts
Receivable Receivable
To transfer the
remaining
xx xx
balance of A/R – Accounts Accounts
assigned to A/R - Receivable - Receivable
unassigned assigned xx - assigned xx

Pro-forma journal entries:

Non-notification vs. Notification
Accounts Receivable – unassigned xx
Accounts Receivable – assigned xx
Total xx
Less: Allowance for Doubtful Accounts xx
Net Realizable Value xx

Included under the line item:

Trade and Other Receivables

Statement Presentation
Accounts Receivable – assigned xx
Less: Note payable – Bank xx
Equity in assigned accounts xx

The assignor (entity) should

disclose its equity in the
assigned accounts

Statement Presentation
 Docile company assigned certain accounts receivable to a
bank for a loan on the following basis: 75% cash advance,
4% service charge on gross accounts assigned, 2% interest
per month is to be charged, and the bank makes the
collections. The entity signed a promissory note for the loan.

July 1 Received remittance upon the specific assignment of

P1,500,000 in accounts to the bank.

Aug. 1 Received notice from the bank that P800,000 of the

assigned accounts were collected. A check was sent to the
bank for one month interest charge.

Docile Company
Sept. 1Received notice from the bank that assigned accounts of
P500,000 were collected in full and the remaining accounts of
P200,000 were being returned. Accordingly, a check was received
from the bank in settlement of the assignment contract. In
making the settlement, the bank deducted the interest charge for
the corresponding period.

REQUIRED:
Prepare journal entries on the books of the assignor.

Docile Company
2015
Jul. 1 Accounts Receivable – assigned 1,500,000
Accounts Receivable 1,500,000

Cash 1,065,000
Service Charge 60,000
Note payable – bank 1,125,000

Aug. 1 Note payable – bank 800,000

Accounts Receivable – assigned 800,000

Interest Expense 22,500

Cash 22,500
2015
Sept. 1 Cash 168,500
Interest Expense 6,500
Note payable – bank 325,000
Accounts Receivable – assigned 500,000

Accounts Receivable 200,000

Accounts Receivable – assigned 200,000

Computation:
Collection by bank 500,000
Payment of loan (1,125,000 – 800,000) 325,000
Excess collection 175,000
Interest (325,000 x 2%) 6,500
Cash Remittance from bank 168,500
Provided the following transactions:
July 1 The entity assigned P500,000 of accounts
receivable to its bank on a non-notification basis in
consideration for a loan. On this date, the bank
advanced P400,000 less a service charge of 2% of the
total accounts assigned, and the entity signed a
promissory note bearing interest of 1% per month on
the unpaid balance at the beginning of the month.

Aug. 1 Collected P330,000 on assigned accounts. The

entity remitted this amount to the bank in payment first
for the interest and the balance to the principal.

Grateful Company
Sept. 1 Collected the remaining balance of assigned
accounts. The entity paid off the remaining loan balance.

REQUIRED:
Prepare journal entries to record the transactions.

Grateful Company
2015
Jul. 1 Accounts Receivable – assigned 500,000
Accounts Receivable 500,000

Cash 390,000
Service Charge 10,000
Note payable – bank 400,000

Aug. 1 Cash 330,000

Accounts Receivable – assigned 330,000

Interest Expense 4,000

Note payable – bank 326,000
Cash 330,000
Sept. 1 Cash 170,000
Accounts Receivable – assigned 170,000

Interest Expense 740

Note payable – bank 74,000
Cash 74,740
 Problem 14-18 Solvent Company
On December 1, 2015, Solvent Company assigned specific
accounts 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 accounts.
The December collections of assigned accounts receivable
amounted to P2,000,000 less cash discount of P200,000. On
December 31, 2015, the entity remitted the collections to the
bank in payment for the interest accrued on December 31,
2015 and the note payable. The entity accepted sales returns of
P100,000 on the assigned accounts and wrote off assigned
accounts of P300,000
1. What amount of cash received from the assignment of accounts receivable
on December 31, 2015?
a. 4,000,000
b. 3,800,000 Note Payable 4,000,000
Finance fee ( 5,000,000 x 5%) (250,000)
c. 4,750,000
Cash Received on December 1 3,750,000
d. 3,750,000

2. What is the carrying amount of note payable on December 31, 2015?

e. 1,840,000 Note Payable 4,000,000
f. 2,140,000 Principal payment:
g. 2,240,000 Remittance 1,800,000
Interest(4Mx12%x1/12) (40,000) 1,760,000
h. 2,200,000
CA of N/P Dec. 31 2,240,000

3. What amount should be disclosed as the equity of SolventReceivable

Accounts Company–in assigned 5
assigned accounts on December 31, 2015? Collections (1,800,000)
i. 260,000 Sales Discounts (200,0
Sales Returns (100,000)
j. 400,000 Accounts Written off (300,0
k. 360,000 Balance of accounts – assigned 2
l. 760,000 Note Payable (2,240,000)
Equity in assigned accounts
 Factoring
Sale of accounts receivable on a without recourse,
notification basis.

Factor
- the bank or financial entity to which the accounts
receivables are sold
- assumes responsibility for uncollectible factored accounts.

Factoring differs from an assignment in that an entity

actually transfers ownership of the accounts receivable to
the factor.
 Casual Factoring

An entity finds itself in a critical cash

position, it may be forced to factor some or
all of its accounts receivable at a substantial
discount to a bank or a finance entity to
obtain the much needed cash.
 Factoring as a continuing agreement

This is where a finance entity purchases all

of the accounts receivable of a certain
entity.

In this setup, before a merchandise is

shipped to a customer, the selling entity
requests the factor’s credit approval. If it is
approved, the account is sold immediately
to the factor after shipment of the goods
 Factoring as a continuing agreement

The factor then assumes the credit function

as well as the collection function.

The factor may withhold a predetermined

amount as a protection against customer
returns and allowances and other special
adjustments.

This amount withheld is known as Factor’s

holdback.
 Problem 14 – 22 Brawny Company

Brawny Company factored P8,000,000 of

accounts receivable to a finance entity at the
beginning of the current year. Control was
surrendered by Brawny Company. The factor
assessed a fee of 5% and retained a holdback
equal to 10% of the accounts receivable. In
addition, the factor charged 15% interest
computed on a weighted average time to maturity
of the accounts receivable of 30 days.
1. What amount was initially received by Brawny Company
from the factoring?
a. 6,701,370 Accounts receivable factored 8,000,000
b. 6,800,000 Interest (8,000,000x15%x30/365) (98,630)
Holdback (8,000,000 x 10%) (800,000)
c. 7,501,370 Finance fee ( 8,000,000 x 5%) (400,000)
d. 6,700,000 Cash initially received from factoring 6,701,370

2. Assuming all accounts receivable are collected, what is

the cost of factoring?
e. 400,000
f. 498,630
g. 898,630 Interest (8,000,000x15%x30/365) 98,630
Finance fee ( 8,000,000 x 5%) 400,000
h. 98,630 Cost of factoring 498,630
 Problem 14 – 23 Moody Company
At the beginning of the current year, Moody Company sold
P5,800,000 in accounts receivable for cash of P5,000,000.
The factor withheld 10% of the cash proceeds to allow for
possible customer returns and other adjustments. An
allowance for bad debts of P600,000 had previously been
established by Moody Company in relation to these
accounts. What was the loss on factoring recognized by
Moody Company?

a. 200,000 Cash received 5,000,000

Carrying amount of accounts receivable
b. 700,000 factored:
c. 500,000 Accounts Receivable 5,800,000
Allowance for Bad Debts (600,000) 5,200,000
d. 800,000 Loss on Factoring (200,000)