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Task No. 18 Receivable Financing
Task No. 18 Receivable Financing
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RECEIVABLE
FINANCING
RECEIVABLE
FINANCING
DISCOUNTING
As a form of receivable financing, discounting specifically pertains to note
receivable.
In a promissory note, the original parties are the maker and the payee.
The maker is the one liable and the payee is the one entitled to payment
on the date of maturity.
When a note is negotiable, the payee may obtain cash before maturity
date by discounting the note at a bank or other financing company.
To discount the note, the payee must endorse it.
Thus, legally the payee becomes an endorser and the bank become an
endorsee.
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ENDORSEMENT
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In the accounting parlance, this is the contingent liability of the endorser.
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TERMS RELATED TO DISCOUNTING OF NOTE
1. Net proceeds refer to the discounted value of the note received by the endor
from the endorsee.
2. Maturity value is the amount due on the note at the date of maturity.
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4. Principal is the amount appearing on the face of the note. It is also referred to as face value.
5. Interest is the amount of interest for the full term of the note. Interest is computed as principal x rate x time.
6. Interest rate is the rate appearing on the face of the note.
7. Time is the period within which interest shall accrue. For discounting purposes, it is the period from date of note
date. In other words, the term “time” is the entire period of “full term” of the note.
8. Discount is the amount of interest deducted by the bank in advance. Discount is equal to maturity value tim
rate times discount period.
9. Discount rate is the rate used by the bank in computing the discount. The discount rate should not be confus
interest rate. The discount rate and interest rate are different from each other. If no discount rate is given, the inte
safely assumed as the discount rate.
10. Discount period is the period of time from date of discounting to maturity date.
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ILLUSTRATION
A P1,000,000, 180-day , 12% note dated July 1 was received from a customer and discounted witho
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.
Discount which is equal to the “maturity value times discount rate times discount period
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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:
The accrued interest receivable is interest earned from July 1 to the date of discounting on
August 30, or 60 days AE-15
ACCOUNTING FOR NOTE RECEIVABLE DISCOUNTING
The accounting for note receivable discounting depends on whether the discounting is with or without recourse
In the illustration, the discounting is without recourse, meaning, the sale of the note receivable is absolute and
is no contingent liability
JOURNAL ENTRY
Cash 1,007,000
Loss on note receivable discounting 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 o
interest income is credited for the actual interest earned on the date of discounting.
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