Accounting 103
MODULE 1
NOTES AND LOANS
RECEIVABLES
Notes Receivable
Discounting of Notes Receivable
Loans Receivable
RECEIVABLES
Review and Overview of Receivables
Module 1_Notes and Loans Receivable
2
RECEIVABLES
Receivables are financial assets that represent a contractual
right to receive cash or another financial asset from another
entity
Claims arising from sale of
merchandise or services in
the ordinary course of
business
Claims arising from sources
other than the sale of
merchandise or services
Trade Receivables
Non-Trade
Receivables
Module 1_Notes and Loans Receivable
3
RECEIVABLES
Trade Receivables
Accounts Receivable
Notes Receivable
Open accounts or those not
supported by promissory notes
Those supported by formal
promises to pay in the form of
notes
Classification : Current or Non-Current Assets
• Dishonored notes shall be removed from notes receivable account and
transferred to accounts receivable at an amount to include, if any, interest
and other charges.
Module 1_Notes and Loans Receivable
4
NOTES RECEIVABLE
Notes Receivable are claims supported
by formal promises to pay usually in the
form of notes
• A negotiable promissory note is an unconditional
promise in writing made by one person to another,
signed by the maker, engaging to pay on demand or
at a fixed determinable future time a sum certain in
money to order or to bearer
• Standing alone, the term notes receivable
represents only claims arising from sale of
merchandise or service in the ordinary course of
business.
Module 1_Notes and Loans Receivable
5
VALUATION OF NOTES RECEIVABLE :
INITIAL RECOGNITION
Conceptually, notes receivable shall be measured initially at Present Value.
Present value is the sum of all future cash flows discounted using the prevailing market rate
of interest (effective interest rate)
Short Term Notes
Receivable
Long term Notes
Receivable
• Short term notes receivable shall be
measured at face value
Module 1_Notes and Loans Receivable
6
➢Interest Bearing Long term notes are
measures at face value which is
actually the present value upon
issuance
➢Noninterest Bearing long-term notes
are measured at present value which is
the discounted value of the future cash
flows using the effective interest rate.
Valuation of Notes Receivable : Initial
Recognition
Interest Bearing NR
Journal Entry
An entity owned a tract of land costing P800,000
and sold the land for P1,000,000.
Notes Receivable
The entity received a 3-year note for P1,000,000
plus interest of 12% compounded annually.
Land
800,000
Gain on Sale of Land
200,000
Accrued Interest Receivable
Notes Receivable is measured initially at
P1,000,000.
Interest Income
(12% x P1,000,000)
P1,000,000 is the Face Value which is actually
the present value upon issuance
Module 1_Notes and Loans Receivable
7
1,000,000
120,000
120,000
Valuation of Notes Receivable : Initial
Recognition
Non-Interest Bearing NR :
Illustration 1
An entity manufactures and sells machinery. On
January 1, 2019, the entity sold machinery costing
P280,000 for P400,000.
Journal Entry 2019
Notes Receivable
400,000
Sales
The buyer signed a noninterest bearing note for
P400,000, payable in four equal installments every
December 31.
350,000
Unearned Interest Income
50,000
FS Presentation
The cash sales price of the machinery is P350,000.
Face Value of Note
400,000
Notes Receivable
400,000
Present value – cash sales price
350,000
Less : Unearned Interest Income
(50,000)
Notes Receivable, Carrying Amount (PV)
350,000
Unearned interest income
50,000
Cash Sale Price
350,000
Cost of Machinery
Module
1_Notes and Loans Receivable
Gross
Income
280,000
70,000
*The present value of NR is equal to the cash
sales price of P350,000 at initial recognition.
(Note : co-relate to your PPE topic, acquisition
through deferred credit)
8
Valuation of Notes Receivable : Initial
Recognition
Non-Interest Bearing NR :
Illustration 2
Computations :
On January 1, 2019, an entity sold an equipment with a
cost of P250,000 for P400,000.
The buyer paid a down of P100,000 and signed a noninterest bearing note for P300,000 payable in equal
annual installment of P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%.
The present value of an ordinary annuity of 1 for three
periods at 10% is 2.4869.
*The present value of the note is computed by multiplying the
annual installment of P100,000 by the present value factor of
2.4869 or P248,690.
Journal Entry : Sale of Equipment
Cash
100,000
Notes Receivable
300,000
Equipment
Gain on sale of equipment
Module
1_Notes
and Loans
Receivable
Unearned
Interest
Income
Face Value of Note
Present Value of Note (100,000 x 2.4869)
Unearned interest Income
300,000
(248,690)
51,310
Present Value of Note
248.690
Cash Received – Down Payment
100,000
Sale Price
348,690
Cost of Equipment
250,000
Gain on Sale of Equipment
98,690
Financial Statement Presentation : Initial Recognition
250,000
98,690
51,310
9
Face Value of Note
300,000
Less : Unearned interest income
(51,310)
Notes Receivable, Carrying Amount (PV)
248,690
Valuation of Notes Receivable : Initial
Recognition
Non-Interest Bearing NR :
Illustration 3
On January 1, 2019, an entity sold an equipment costing
P600,000 with accumulated depreciation of P250,000.
The entity received as consideration P100,000 cash and
a P400,000 noninterest bearing note due on January 1,
2022.
The prevailing rate of interest for a note of this type is
10%. The present value of 1 at 10% for 3 years is
0.7513.
Note : Note is collectible on a lump sum basis after 3
years.
Journal Entry : Sale of Equipment
Cash
100,000
Notes Receivable
400,000
Accumulated Depreciation
250,000
Equipment
Gain on Sale of Equipment
Unearned
Interest
Income
Module
1_Notes
and Loans
Receivable
*The
Unearned
Interest
Income is
sometimes
described as
600,000
“Discount on
50,520 Note
10
99,480 Receivable”
Computations :
Face Value of Note
Present Value of Note (400,000 x .7513)
Unearned interest Income*
400,000
(300,520)
99.480
Present Value of Note
300,520
Cash Received – Down Payment
100,000
Sale Price
400,520
Carrying Amount of Equipment (600k-250k)
Gain on Sale of Equipment
(350,000)
50,520
Financial Statement Presentation : Initial Recognition
Face Value of Note
400,000
Less : Unearned interest income
(99,480)
Notes Receivable, Carrying Amount (PV)
300,520
VALUATION OF NOTES RECEIVABLE :
SUBSEQUENT RECOGNITION
Subsequent to initial recognition, long term notes receivable shall
be measured at “amortized cost”.
• “Amortized cost” = the amount at which the receivable is
measured initially – principal repayment+ or – the cumulative
amortization of any difference between the initial carrying
amount and the principal maturity amount - reduction for
impairment or uncollectibility.
Module 1_Notes and Loans Receivable
11
Valuation of Notes Receivable : Subsequent
Recognition
Non-Interest Bearing NR :
Illustration 1
An entity manufactures and sells machinery. On
January 1, 2019, the entity sold machinery costing
P280,000 for P400,000.
The buyer signed a noninterest bearing note for
P400,000, payable in four equal installments every
December 31.
The cash sales price of the machinery is P350,000.
To recognize the unearned interest income over the term of
the note:
Unearned interest income
Interest Income
FS Presentation :Subsequent Measurement (Current Portion)
400,000
Sales
350,000
Unearned Interest Income
50,000
Notes Receivable
Module 1_Notes and Loans Receivable
Notes Receivable
100,000
Less : Unearned Interest Income
(15,000)
Carrying Amount or Amortized cost
To record the first installment collection
Cash
20,000
The recognition of the unearned interest income is
based on the outstanding NR method
Journal Entry 2019
Notes Receivable
20,000
85,000
FS Presentation:Subsequent Measurement (Non-Current Portion)
100,000
100,000
12
Notes Receivable – non current portion
200,000
Less : Unearned Interest Income
(15,000)
Carrying Amount or Amortized cost
185,000
Valuation of Notes Receivable: Subsequent
Recognition
Non-Interest Bearing NR :
Illustration 2
Computations :
On January 1, 2019, an entity sold an equipment with a
cost of P250,000 for P400,000.
The buyer paid a down of P100,000 and signed a noninterest bearing note for P300,000 payable in equal
annual installment of P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%.
The present value of an ordinary annuity of 1 for three
periods at 10% is 2.4869.
*The present value of the note is computed by multiplying the
annual installment of P100,000 by the present value factor of
2.4869 or P248,690.
Journal Entry : Sale of Equipment
Cash
100,000
Notes Receivable
300,000
Equipment
Gain on sale of equipment
Module
1_Notes
and Loans
Receivable
Unearned
Interest
Income
Face Value of Note
Present Value of Note (100,000 x 2.4869)
Unearned interest Income
300,000
(248,690)
51,310
Present Value of Note
248.690
Cash Received – Down Payment
100,000
Sale Price
348,690
Cost of Equipment
250,000
Gain on Sale of Equipment
98,690
Financial Statement Presentation : Initial Recognition
250,000
98,690
51,310
13
Face Value of Note
300,000
Less : Unearned interest income
(51,310)
Notes Receivable, Carrying Amount (PV)
248,690
Valuation of Notes Receivable : Subsequent
Recognition
Non-Interest Bearing NR :
Illustration 2
Journal Entry : Sale of Equipment
Cash
100,000
Notes Receivable
300,000
Equipment
*In this case, the computation of interest income is made
using the effective interest method
250,000
Gain on sale of equipment
98,690
Unearned Interest Income
51,310
To record the first installment collection
Cash
100,000
Notes Receivable
100,000
Date
Jan. 1, 2019
Dec. 31, 2019
Dec. 31, 2020
Dec. 31, 2021
TOTALS
Annual
C ollection
100,000
100,000
100,000
3 0 0 ,0 0 0
Interest
Incom e
24,869
17,356
9,085
5 1 ,3 1 0
Face Value of Note
Unearned interest income
Less : First Installment Collection
Interest Income
Module 1_Notes and Loans Receivable
24,869
75,131
82,644
90,915
2 4 8 ,6 9 0
Present Value
248,690
173,559
90,915
-
Financial Statement Presentation : Subsequent Recognition
(end of 2019)
To record the interest income for 2019
24,869
Principal
300,000
(100,000)
Less : Unearned Interest Income
(26,441)
Carrying
Amount of NR (PV)
14
173,559
Valuation of Notes Receivable : Subsequent
Recognition
Non-Interest Bearing NR :
Illustration 3
On January 1, 2019, an entity sold an equipment costing
P600,000 with accumulated depreciation of P250,000.
The entity received as consideration P100,000 cash and
a P400,000 noninterest bearing note due on January 1,
2022.
The prevailing rate of interest for a note of this type is
10%. The present value of 1 at 10% for 3 years is
0.7513.
Note : Note is collectible on a lump sum basis after 3
years.
Journal Entry : Sale of Equipment in 2019 (Jan)
Cash
100,000
Notes Receivable
400,000
Accumulated Depreciation
250,000
Equipment
Gain on Sale of Equipment
Unearned
Interest
Income
Module
1_Notes
and Loans
Receivable
Journal Entry : Recognition of Interest Income for 2019
Dec. 31
Unearned Interest Income
30,052
Interest Income
Da te
Jan. 1, 2019
Dec. 31, 2019
Dec. 31, 2020
Dec. 31, 2021
TOTALS
Inte re st
Inco m e
30,052
33,057
36,371
9 9 ,4 8 0
30,052
U ne a rne d Int.
Inco m e
99,480
69,428
36,371
-
Pre se nt
Va lue
300,520
330,572
363,629
400,000
Financial Statement Presentation : Subsequent
Recognition (End of 2019)
600,000
50,520
99,480
15
Face Value of Note
400,000
Less : Unearned interest income
(69,428)
Notes Receivable, Carrying Amount (PV)
330,572
SAMPLE EXERCISES
Problem 6-1 (Feasible Company)
Problem 6-2 (Bygone Company)
Problem 6-3 (Innovative Company)
Problem 6-11 (Persevere Company)
Try solving the problems prior to viewing the answers
ASSIGNMENT
Problem 6-4 (Gullible Company)
Problem 6-5 (Enigma Company)
Problem 6-12 (Precious Company)
LOAN RECEIVABLE
Module 1_Notes and Loans Receivable
18
LOAN RECEIVABLE
A loan receivable is a financial asset arising
from a loan granted by a bank or other
financial institution to a borrower of client.
• The term of the loan may be short-term but in most cases,
the repayment periods cover several years.
Module 1_Notes and Loans Receivable
19
MEASUREMENT OF LOAN RECEIVABLE
INITIAL RECOGNITION
SUBSEQUENT MEASUREMENT
• At initial recognition, an entity shall measure a
loan receivable at fair value plus transaction
costs that are directly attributable to the
acquisition of the financial asset.
• A Loan Receivable is measured subsequently
at Amortized Cost using the effective interest
method.
• Fair value = Transaction price (amount of loan
granted)
• Amortized cost is the amount at which the
loan receivable is measured initially minus
principal repayment, plus or minus cumulative
amortization of any differences between the
initial carrying amount and the principal
maturity amount minus reduction for
impairment or uncollectibility.
• Direct origination costs should be included in
the transaction cost that is part of the initial
measurement of the Loan Receivable
• Indirect origination costs should be treated as
outright expense
Module 1_Notes and Loans Receivable
20
ORIGINATION FEES
• Includes compensation for the following activities:
✓ Evaluating the borrower’s financial condition
✓ Evaluating guarantees, collateral, and other security
✓ Negotiating the terms of the loan
✓ Preparing and processing the documents related to
the loan
✓ Closing and approving the loan transaction
The fees charged by the bank against the
borrower for the creation of the loan are
known as origination fees.
Module 1_Notes and Loans Receivable
21
ACCOUNTING FOR ORIGINATION FEES
• The origination fees received from borrower are recognized as unearned interest income and amortized over
the term of the loan.
• If the origination fees are not chargeable against the borrower, the fees are known as “direct origination costs”
• Preferably, the direct origination costs are offset directly against any unearned origination fees received.
• The origination fees received and the direct origination costs are included in the measurement of the loan
receivable.
Illustration :
Global Bank granted a loan to a borrower on January 1,
2019. The interest on the loan is 12% payable annually
starting December 31, 2019. The loan matures in three
years on December 31, 2021.
Initial Carrying Amount of the Loan
Principal amount
Direct Origination costs incurred
5,000,000
Origination fees received from borrower
331,800
Direct origination costs incurred
100,000
Module 1_Notes and Loans Receivable
Principal Amount
5,000,000
Origination fees received
(331,800)
Initial Carrying Amount of Loan
22
100,000
4,768,200
ACCOUNTING FOR ORIGINATION FEES
Illustration :
Journal Entries on January 1, 2019:
Global Bank granted a loan to a borrower on January 1,
2019. The interest on the loan is 12% payable annually
starting December 31, 2019. The loan matures in three
years on December 31, 2021.
Principal amount
To record the loan
Loan Receivable
Cash
5,000,000
Origination fees received from borrower
331,800
Direct origination costs incurred
100,000
5,000,000
Origination fees received
(331,800)
Direct Origination costs incurred
Initial Carrying Amount of Loan
Module 1_Notes and Loans Receivable
5,000,000
To record the origination fees received from the borrower:
Cash
331,800
Unearned interest income
Initial Carrying Amount of the Loan
Principal Amount
5,000,000
331,800
To record the direct origination costs incurred by the bank:
Unearned interest income
Cash
100,000
100,000
100,000
Because of the origination fees received and the direct
origination costs, a new effective interest rate must be
computed
4,768,200
23
ACCOUNTING FOR ORIGINATION FEES
Illustration :
Global Bank granted a loan to a borrower on January 1, 2019.
The interest on the loan is 12% payable annually starting
December 31, 2019. The loan matures in three years on
December 31, 2021.
Principal amount
5,000,000
Origination fees received from borrower
331,800
Direct origination costs incurred
100,000
Initial Carrying Amount of the Loan
Principal Amount
Origination fees received
Direct Origination costs incurred
Initial Carrying Amount of Loan
Am ortiz ation Table - Effective Interest M ethod
Interest
Interest
Date
Am ortiz ation
Received
Incom e
Jan. 1, 2019
Dec. 31, 2019
600,000
667,548
67,548
Dec. 31, 2020
600,000
677,005
77,005
Dec. 31, 2021
600,000
687,247
87,247
TOTALS
1 ,8 0 0 ,0 0 0
2 ,0 3 1 ,8 0 0
2 3 1 ,8 0 0
C arrying
Am ount
4,768,200
4,835,748
4,912,753
5,000,000
Interest Received = Principal times nominal rate
Interest income = Carrying Amount times effective rate
Carrying Amount = Previous’ years CA plus amortization
5,000,000
(331,800)
Journal Entries on December 31, 2019
100,000
Cash
4,768,200
Since the initial carrying amount of the loan receivable of
P4,768,200 is lower than the principal amount, it means there
is a discount and therefore the effective rate must be higher
than the nominal rate of 12%.
After consideration of the origination fee and the direct
origination cost, the effective interest rate is determined to
be 14%.
600,000
Interest Income
24
Unearned interest income
Interest Income
600,000
67,548
67.548
ACCOUNTING FOR ORIGINATION FEES
• FINANCIAL STATEMENT PRESENTATION
If a statement of Financial Position is prepared on December 31, 2019, the loan receivable is presented as follows:
Loan Receivable
5,000,000
Unearned Interest Income (231,800-67,548)
(164,252)
Carrying Amount, December 31, 2019
4,835,748
Module 1_Notes and Loans Receivable
25
Impairment of Loan
PFRS 9, paragraph 5.5.1, provides that an entity shall
recognize a loss allowance for expected credit losses on
financial asset measured at amortized cost.
• Credit losses are the present value of all cash shortfalls.
• Expected credit losses are an estimate of credit losses
over the life of the financial instrument.
Measurement of Impairment
❑The probability – weighted outcome
❑The time value of money
❑Reasonable and supportable information
Module 1_Notes and Loans Receivable
26
IMPAIRMENT OF LOAN
Illustration :
International Bank loaned P5,000,000 to Bankard Company on January 1, 2017.
The terms of the loan require principal payment of P1,000,000 each year for 5
years plus interest at 10%.
The first principal and interest payment is due on December 31, 2017. Bankard
Company made the required payment s on Dec. 31, 2017 and Dec. 31, 2018.
Using the original effective rate of 10%, the present
value of 1 is .9091 for one period, .8264 for two
periods and .7513 for three periods.
Present Value of the Cash Flows
December 31, 2020 (500,000 x .9091)
454,550
However, during 2019, Bankard Company began to experience financial
difficulties and was unable to make the required principal and interest payment
on Dec 31, 2019.
December 31, 2021 (1,000,000 x .8264)
826,400
December 31, 2022 (1,500,000 x .7513)
1,126,950
On Dec. 31 2019, International Bank assessed the collectability of the loan and
has determined that the remaining principal payments will be collected but the
collection of the interest is unlikely.
Total Present Value of Cash Flows
2,407,900
The loan receivable has a carrying amount of P3,300,000 including the accrued
interst of P300,000 on December 31, 2019. International Bank projected the
cash flows from the loan on December 31, 2019.
Date of Cash Flow
Amount Projected
December 31, 2020
500,000
December 31, 2021
1,000,000
December 31, 2022
1,500,000
27
IMPAIRMENT OF LOAN
Using the original effective rate of 10%, the present
value of 1 is .9091 for one period, .8264 for two
periods and .7513 for three periods.
Journal Entries on December 31, 2019
Loan Impairment Loss
Present Value of the Cash Flows
December 31, 2020 (500,000 x .9091)
454,550
December 31, 2021 (1,000,000 x .8264)
826,400
December 31, 2022 (1,500,000 x .7513)
1,126,950
Total Present Value of Cash Flows
2,407,900
COMPUTATION OF IMPAIRMENT LOSS
Accrued Interest Receivable
300,000
Allowance for Loan Impairment
592,100
Statement Presentation on December 31, 2020
Loan Receivable
3,000,000
Allowance for Loan Impairment
(592,100)
Carrying Amount
2,407,900
Journal Entries on December 31, 2020
The impairment loss is the difference between the carrying
amount of the loan and the present value of the cash flows.
Carrying Amount of Loan
3,300,000
Present value of Cash Flows
2,407,900
Impairment Loss
892,100
892,100
Cash
500,000
Loan Receivable
Allowance for Loan Impairment
28
Interest Income
(2,407,900 x 10%)
500,000
240,790
240,790
SAMPLE EXERCISES
Problem 7-1 (Nasty Bank)
Problem 7-3 (Pauper Bank)
Problem 7-5 (Solvent Bank)
Problem 7-9 (Moderate Bank)
Try solving the problems prior to viewing the answers
ASSIGNMENT
Problem 7-2 (Awesome Bank)
Problem 7-6 (Solvent Bank)
Problem 7-10 (Solid Bank)
DISCOUNTING OF NOTES RECEIVABLE
Receivable Financing
Module 1_Notes and Loans Receivable
31
CONCEPT OF DISCOUNTING
As a form of receivable financing, discounting specifically pertains to note receivable
Maker → the one liable
Payee → the one entitled to payment on the date of maturity
❖ To discount the note, the payee must endorse it. Thus, payee becomes endorser and the bank
becomes endorsee.
❖ Endorsement is the transfer of right to a negotiable instrument by simply signing at the back of
the instrument
❖ Endorsement may be with recourse (endorser shall pay the endorsee if the maker dishonors the
note), or without recourse (the endorser avoids future liability even if the maker refuses to pay
the endorsee on the date of maturity).
TERMS RELATED TO DISCOUNTING OF NOTE
Net Proceeds
The discounted value of the note received by the endorser from the endorsee
(Maturity Value minus Discount)
Maturity Value
Amount due on the note at the date of maturity.
(Principal plus interest)
Maturity Date
Date on which the note should be paid
Principal
Amount appearing on the face of the note. Also referred to as face value
Interest
Amount of interest for the full term of the note
(Principal x rate x time)
Interest Rate
Rate appearing on the face of the note
Time
Period within which interest shall accrue. For discounting purposes, it is the period from
date of note to maturity date
Discount
Amount of interest deducted by the bank in advance.
(Maturity value x discount rate x discount period)
Discount Rate
Rate sed by the bank in computing the discount.
If no discount rate is given, the interest rate is safely assumed as the discount rate.
Discount Period
Period of time from date of discounting to maturity date
Equals to the term of the note minus the expired portion up to the date of discounting.
Unexpired term of the note
Discounting : Illustration 1
The following formula are useful to solve the
required in the problem:
Sample Data of a Notes Receivable
✓ Date of Note
:
January 1, 2015
✓ Face Value
:
P500,000
✓ Interest Rate
:
12%
✓ Time
:
6 months
✓ Discounted to Bank on March 1, 2015
✓ Discount Rate
:
MV = 500,000 + (500,000 x 12% x 6/12)
MV = 500,000 + 30,000 = 530,000
15%
Discount = 530,000 x 15% x 4/12
Discount = 26,500
Compute for the following :
❑ Net Proceeds
❑ Gain or Loss on Discounting
Net Proceeds = 530,000 - 26,500
Net Proceeds = 503,500
Carrying Amount = 500,000 + (500,000 x 12% x 2/12)
Carrying Amount = 500,000 + 10,000 = 510,000
34
Gain or Loss on Discounting = 503,500 - 510,000
Loss = 6,500
DISCOUNTING OF NOTES RECEIVABLE
•
Endorser avoids future liability even if
the maker refuses to pay the endorsee
on the date of maturity
•
Sale is absolute, no contingent liability
recognize
•
Recognize contingent liability –
Notes Receivable Discounted
•
Notes
Receivable
derecognized
•
Derecognize the asset (NR)
•
•
•
Recognize gain or loss on discounting
Notes Receivable Discounted is
presented as a deduction from
Total Notes Receivable with
disclosure of the contingent
liability
Liability is recognized - equal to
face amount of note receivable
discounted
•
No gain
instead
expense
•
Loss on discounting is
recognized
is
not
or loss recognized,
recognize
interest
DISCOUNTING OF NOTES RECEIVABLE
Discounting Without Recourse
❑ Endorser avoids future liability
even if the maker refuses to pay
the endorsee on the date of
maturity
Discounting With Recourse
– Conditional Sale
❑ Recognize contingent liability –
Notes Receivable Discounted
❑ Derecognize the asset (NR)
❑ Notes Receivable Discounted
is presented as a deduction
from Total Notes Receivable
with disclosure of the
contingent liability
❑ Recognize gain or loss on
discounting
❑ Loss on discounting is
recognized
❑ Sale is absolute, no contingent
liability recognize
Module 1_Notes and Loans Receivable
36
Discounting With
Recourse – Secured
Borrowing
❑ Notes Receivable is not
derecognized
❑ Liability is recognized equal to face amount of
note receivable discounted
❑ No gain or loss
recognized, instead
recognize interest
expense
Illustration : Discounting Without Recourse
Tender Company accepted from a customer a
P4,000,000, three-month, 12% note dated August
31, 2015. On September 30, 2015, the entity
discounted without recourse the note at 15%.
C. Net Proceeds
Net Proceeds = MV - Discount
Net Proceeds = 4,120,000 - 103,000
Net Proceeds =4,017,000
D. Carrying Amount of Note Receivable
CA = Principal Bal + Accrued Interest
CA = 4,000,000 + (4,000,000 x 12% x 1/12)
CA =
4,040,000
Compute for the following :
a. Maturity Value of the note
b. Discount
c. Net Proceeds
d. Carrying Amount of Note Receivable at time
of discounting
e. Gain / Loss on Discounting
E. Gain / Loss on Discounting
Gain / Loss = Net Proceeds - Carrying Amount
Gain / Loss = 4,017,000 - 4,040,000
Loss =
23,000
A. Maturity Value of the Note
MV = Principal + Interest
MV = 4,000,000 + (4,000,000 x 12% x 3/12)
MV =
4,120,000
B. Discount
Discount = MV x Disc Rate x Disc Period
Discount = 4,120,000 x 15% x 2/12
Discount =
103,000
Journal Entry
Cash
Loss on NR Discounting
37
4,017,000
23,000
Note Receivable
4,000,000
Interest Income
40,000
Illustration : Discounting With
Recourse – Conditional Sale
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%.
C. Net Proceeds
Net Proceeds = MV - Discount
Net Proceeds =2,544,000 - 159,000
Net Proceeds =
2,385,000
If the discounting is treated as a conditional sale,
Compute for the following :
a. Maturity Value of the note
b. Discount
c. Net Proceeds
d. Carrying Amount of Note Receivable at time
of discounting
e. Gain / Loss on Discounting
D. Carrying Amount of Note Receivable
CA = Principal Bal + Accrued Interest
CA = 2,400,000 + (2,400,000 x 12% x 1/12)
CA =
2,424,000
E. Gain / Loss on Discounting
Gain / Loss = Net Proceeds - Carrying Amount
Gain / Loss = 2,385,000 - 2,424,000
Loss =
39,000
Journal Entry
A. Maturity Value of the Note
MV = Principal + Interest
MV = 2,400,000 + (2,400,000 x 12% x 6/12)
MV =
2,544,000
B. Discount
Discount = MV x Disc Rate x Disc Period
Discount =2,544,000 x 15% x 5/12
Discount = 159,000
Cash
Loss on NR Discounting
Note Receivable Discounted
38
2,385,000
39,000
2,400,0000
Interest Income
24,000
The Note Receivable Discounted account is deducted from the total
notes receivable when preparing the statement of financial position
with disclosure of the contingent liability
Illustration : Discounting With
Recourse – Conditional Sale
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%.
If the discounting is treated as a conditional sale,
Total payment is charged to accounts receivable
Journal Entry
Cash
Loss on NR Discounting
Journal Entry : Payment to First Bank
2,385,000
Accounts Receivable
39,000
Note Receivable Discounted
2,400,0000
Interest Income
Journal Entry
Notes Receivable
2,550,000
Cash
2,550,000
24,000
NOTE IS PAID BY MAKER ON MATURITY
On August 1, date of maturity, the note is paid by the maker to the
First Bank.
Note Receivable Discounted
NOTE IS DISHONORED BY MAKER
The 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 P6,000.
2,400,000
2,400,000 39
Journal Entry : Cancel the Contingent Liability
Notes Receivable Discounted
Notes Receivable
2,400,000
2,400,000
Illustration : Discounting With
Recourse – Secured Borrowing
If the discounting is treated as a secured borrowing, the note receivable is not derecognized but instead an accounting
liability is recorded at an amount equal to the face amount of the note receivable discounted.
NOTE IS PAID BY MAKER ON MATURITY
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%.
Journal Entry
Liability for NR Discounted
If the discounting is treated as a Secured
Borrowing:
Cash
2,385,000
Interest Expense
Liability for NR Discounted
39,000
2,400,0000
Interest Income
24,000
❖ The Interest Expense can be netted against the interest income
(net interest expense of P15,000) because the discounting
transaction is a borrowing.
❖ There is no Gain or Loss on Discounting.
2,400,000
NOTE IS DISHONORED BY MAKER
The 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 P6,000.
Journal Entry
Cash
2,400,000
40
Journal Entry : Payment to First Bank
Accounts Receivable
2,550,000
Cash
2,550,000
Journal Entry : Derecognized the Liability for NR Discounted & NR
Liability for NR Discounted
Notes Receivable
2,400,000
2,400,000
SAMPLE EXERCISES
Problem 9-1 (Walleye Company)
Problem 9-2 (Morale Company)
Problem 9-5 (Stable Company)
Try solving the problems prior to viewing the answers
ASSIGNMENT
Problem 9-6 (Machete Company)
Problem 9-8 (Foremost Company)
Problem 9-9 (Jolly Company)
THANK YOU!