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Discounting

Discounting of notes receivable allows the holder to endorse a note to a bank in exchange for the maturity value less a discount. The note can be discounted with or without recourse, where with recourse the holder is liable if the maker does not pay and without recourse the note is sold outright.

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14 views

Discounting

Discounting of notes receivable allows the holder to endorse a note to a bank in exchange for the maturity value less a discount. The note can be discounted with or without recourse, where with recourse the holder is liable if the maker does not pay and without recourse the note is sold outright.

Uploaded by

Barbie Bleu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Discounting of Notes Receivable (Summary)

Another form of receivable financing is discounting of notes receivable. The holder endorses the
note to the bank in exchange for maturity value of the note less a discount. The bank collects the
maturity value of the note from the maker. Note be discounted with or without recourse.
Discounting With Recourse
 In case if the maker fails to pay, the holder is held liable.
 The note discounted is not derecognized.
 The discounting is accounted for in either:
o Conditional sale of note receivable- contingent liability equal to face amount of the
note discounted is disclosed only in the notes to financial statements
Entry to record discounting:
Cash on Hand xx
Loss on Discounting xx
Note Receivable Discounted xx
Interest Income xx
Entry to record collection:
Note Receivable Discounted xx
Note Receivable xx
o Secured borrowing- liability equal to the face amount of the note discounted is
recognized on the discounting
Entry to record discounting:
Cash on Hand xx
Interest Expense xx
Liability on Note Discounted xx
Interest Income xx
Entry to record collection:
Liability on Note Discounted xx
Note Receivable xx

Maturity Value = Principal + Interest for the full term of note


Discount Period = Full Term – Expired Term
Discount = Maturity Value × Discount rate × Discount period

Discounting Without Recourse


 The holder is not held liable in case the maker fails to pay.
 The note discounted has been sold outright thus derecognized.
To record discounting:
Cash on Hand xx
Loss on Discounting xx
Note Receivable xx
Interest Income xx
Formulas to be used:
Net Proceeds = Maturity Value – Discount
Maturity Value = Principal + Interest for the full term of note
Discount = Maturity Value × Discount rate × Discount period
o Discount period- the remaining period to maturity date of note as of date of discounting;
unexpired term of the note
o Discount rate- the rate at which the note is discounted with a bank
o Interest Income- the accrued interest as of the date of discounting

Dishonoured Notes
 Note Receivable that are not collected at maturity.
 When dishonoured, a note loses its negotiable characteristic and becomes an ordinary claim.
 Transferred from Notes Receivable to Accounts Receivable.
 Amount transferred is the maturity value of the note plus any costs directly attributable to the
dishonour, the receivable is assessed for impairment.

Entry to record dishonoured note:


Note Receivable Dishonoured xx
Note Receivable xx
Accounts Receivable xx
Cash on Hand xx

Discounting of Own Note


 When entity borrows money from bank and discounts its own note means that the bank
deducted in advance the interest on the loan.
 Loan proceeds is equal to the principal less the interest deducted in advance.

To record own note discounted:


Cash on Hand xx
Discount on Note Payable xx
Note Payable xx

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