Dominican College of Tarlac

College of Business and Accountancy

Junior Philippine Institute of Accountants

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RECEIVABLE
FINANCING

Reference: Intermediate Accounting 1

(Valix)
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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

It is the transfer of the right to a negotiable instrument by simply signing at

the back of the instrument.
Endorsement may be with recourse which means that the endorser shall pay
the endorsee if the maker dishonors the note.
In the legal parlance, this is the secondary liability of the endorser

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In the accounting parlance, this is the contingent liability of the endorser.

Endorsement may be without recourse which means that the endorser

avoids future liability even if the maker refuses to pay the endorsee on the
date of maturity.
In the absence of any evidence to the contrary, endorsement is assumed
to be with recourse.

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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.

Net proceeds = Maturity value minus Discount

2. Maturity value is the amount due on the note at the date of maturity.

Principal plus interest = Maturity value

3. Maturity date is the date in which the note should be paid.

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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:

Term of note 180 days

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

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
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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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