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Receivable Financing LOAN SALE WITH RECOURSE WITHOUT RECOURSE PLEDGING ASSIGNMENT FACTORING DISCOUNTING WITH RECOURSE WITHOUT RECOURSE PAYABLE PLEDGING CASH xx NOTES PAYABLE RECEIVABLE xx DISCLOSURE IN THE NOTES TO THE FS GENERAL RECEIVABLES ASSIGNMENT SPECIFIC RECEIVABLES CASH xx NOTES PAYABLE xx ARA AR ARA = Accounts Receivable - Assigned xx xx FACTORING ( ACCOUNTS RECEIVABLE ) ACCOUNTS RECEIVABLE FACTORED FACTORING FEE SALES PRICE OF ACCOUNTS RECEIVABLE FACTOR’S HOLDBACK PROCEEDS XX (XX) XX (XX) XX GAIN OR LOSS ON FACTORING ACCOUNTS RECEIVABLE FACTORED FACTORING FEE SALES PRICE OF AR FACTOR’S HOLDBACK PROCEEDS xx (xx) xx (xx) SALES PRICE OF AR CARRYING VALUE OF AR GAIN/LOSS ON FACTORING xx xx (xx) xx DISCOUNTING ( NOTES RECEIVABLE ) Maturity Value Discount Principal + Interest Maturity value x Discount rate x Discount period Remaining period Proceeds Maturity value - Discount GAIN OR LOSS ON DISCOUNTING - Without Recourse SALES PRICE OF NOTES RECEIVABLE ( PROCEEDS ) CARRYING VALUE OF NOTES RECEIVABLE GAIN/LOSS ON DISCOUNTING XX (XX) XX Principal + Interest EARNED Interest EARNED = Principal x Interest rate x Holding period Journal entries : November 1 Proceeds from Assignment = 3,000,000 - (3,000,000 x 5 %) = 2,850,000 Cash 2,850,000 Expense 150,000 Loans Payable 3,000,000 AR-A 4,000,000 AR 4,000,000 ACCOUNTS RECEIVABLE - ASSIGNED 11/1 = 4,000,000 11/30 = 3,470,000 12/31= 2,420,000 500,000 30,000 900,000 50,000 100,000 DATE PAYMENT INTEREST 12% REDUCTION IN PRINCIPAL CV OF LOANS PAYABLE 11/1 - - - 3,000,000 11/30 500,000 30,000 470,000 2,530,000 12/31 900,000 25,300 874,700 1,655,300 Journal entry : February 1, 2019 ACCOUNTS RECEIVABLE FACTORED 300,000 FACTORING FEE (3% x 300,000) (9,000) SALES PRICE OF AR 291,000 FACTOR’S HOLDBACK (5% x 300,000) (15,000) Cash 276,000 Receivable from factor 15,000 Loss on Factoring 9,000 Accounts receivable SALES PRICE OF AR CARRYING VALUE OF AR LOSS ON FACTORING PROCEEDS 276,000 300,000 291,000 (300,000) (9,000) Total interest is deducted in advance 470,000 + 850,000 PRINCIPAL 500,000 TOTAL INTEREST ( 12% x 500,000 x 6/12 ) (30,000) PROCEEDS from PLEDGING 470,000 ACCOUNTS RECEIVABLE FACTORED 1,000,000 FACTORING FEE (5% x 1,000,000) (50,000) SALES PRICE OF AR 950,000 FACTOR’S HOLDBACK (10% x 1,000,000) PROCEEDS from FACTORING (100,000) 850,000 Total interest is deducted in advance 470,000 + 850,000 PLEDGING - loan FACTORING - sale TOTAL RECEIVABLES, 12/31/19 600,000 -0600,000 NOTE A Maturity Value Discount Proceeds FACE VALUE / PRINCIPAL 40,000 INTEREST ( 40,000 x .10 x 12/12 ) 4,000 MATURITY VALUE 44,000 44,000 x .15 x 5/12 = 2,750 MATURITY VALUE 44,000 DISCOUNT (2,750) PROCEEDS 41,250 NOTE B FACE VALUE / PRINCIPAL Maturity Value Discount Proceeds 40,000 INTEREST ( 40,000 x .08 x 6/12 ) 1,600 MATURITY VALUE 41,600 41,600 x .15 x 4/12 = 2,080 MATURITY VALUE 41,600 DISCOUNT (2,080) PROCEEDS 39,520 Journal entries : July 1, 2019 - NOTE B Interest receivable NOTE B Interest income SALES PRICE OF NOTES RECEIVABLE ( proceeds ) CARRYING VALUE OF NOTES RECEIVABLE 39,520 (40,533) LOSS ON DISCOUNTING INTEREST EARNED CARRYING VALUE OF NOTES RECEIVABLE (1,013) 40,000 533 40,533 40,000 x .08 x 2 / 12 = 533 533 Cash 39,520 Loss on discounting 1,013 Notes receivable Interest receivable FACE VALUE / PRINCIPAL 533 40,000 533 Impairment of Receivables IMPAIRMENT LOSS CARRYING VALUE of Notes Receivable xx PRESENT VALUE of Restructured Future Cash In ows Impairment Loss ( CV > PV ) (xx) xx CV of Notes Receivable Principal only ( No Accrued Interest ) Principal plus Interest ( With Accrued Interest ) PV of Restructured Future Cash Inflows PV factor based on Original Effective Rate Condonation of accrued interest Reduction of Principal Reduction of Interest rate fl fl Extension of maturity date Present value of PRINCIPAL xx Present value of INTEREST xx PV of Restructured Future Cash In ows xx 5,500,000 CV of Notes Receivable = 5,000,000 + 500,000 = 5,500,000 PV of a single payment at 10% for 3 periods = .7513 Restructured Interest = 4,000,000 x .08 = 320,000 PV of an ordinary annuity at 10% for 3 periods = 2.4869 5,500,000 ( 3,801,008 ) 1,698,992 Present value of PRINCIPAL ( 4,000,000 x .7513 ) Present value of INTEREST ( 320,000 x 2.4869 ) fl PV of Restructured Future Cash In ows 3,005,200 795,808 3,801,008 Restructured Interest = 4,000,000 x .08 = 320,000 5,500,000 ( 3,801,008 ) 1,698,992 Journal entry : December 31, 2019 Notes Receivable - New 4,000,000 Impairment loss 1,698,992 5,000,000 Notes receivable - Old Interest receivable 500,000 Discount on notes receivable 198,992 4,000,000 FACE VALUE PRESENT VALUE (3,801,008) DISCOUNT ON NOTES RECEIVABLE 198,992 or DATE NOMINAL INTEREST (8%) EFFECTIVE INTEREST (10%) AMORTIZATION OF DISCOUNT CV OF NOTES RECEIVABLE 12/31/19 - - - 3,801,008 12/31/20 320,000 380,101 60,101 3,861,109 5,000,000 12/31/21 320,000 386,111 66,1111 3,927,220 500,000 12/31/22 320,000 392,780 72,780 4,000,000 Journal entry : December 31, 2019 Restructured Notes Receivable Impairment loss Notes receivable Interest receivable 3,801,008 1,698,992 1. How much is the interest income for the year 2019? 2. How much is the interest receivable/accrued interest 2,800,000 x .15 x 9 / 12 = 315,000 2,800,000 x .15 x 9 / 12 = 315,000 for the year 2019? 3. How much is the interest income for the year 2020? 1/1/20 to 3/31/20 = 2,800,000 x .15 x 3 / 12 105,000 4/1/20 to 12/31/20 = 2,100,000 x .15 x 9 / 12 236,250 TOTAL INTEREST INCOME - 2020 341,250 4. How much is the interest receivable/accrued interest for the year 2020? 2,100,000 x .15 x 9/12 = 236,250 5. How much is the carrying value of notes receivable on December 31, 2019? 2,800,000 - 0 = 2,800,000 6. How much is the carrying value of notes receivable on December 31, 2020? 2,800,000 - 700,000 = 2,100,000 RECEIVABLES TRADE are claims arising from sale of merchandise or service in the ordinary course of business operations; such as the following (a) accounts receivable and (b) notes receivable. fi fi fi Classi ed as CURRENT ASSETS if collectible within one year or within the normal operating cycle whichever is LONGER NON-TRADE are claims arising from sources other than from sale of goods and services in the normal course of business; such as the following (a) advances to of cers and employees (b) advances to subsidiaries (c) dividends and interest receivable (d) deposits as a guarantee of performance or payment (e) deposits to cover potential damages or losses (f ) claims for; insurance, tax refun ds, lawsuits, merchandise damaged or lost in transit Classi ed as CURRENT ASSETS only if collectible within one year