No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

Receivable Financing

NATURE OF RECEIVABLE FINANCING

Receivable financing is the financial flexibility or capability of a company to raise money out of its receivables.

FORMS OF RECEIVABLE FINANCING

1. Pledge of accounts receivable
2. Assignment of accounts receivable
3. Factoring of accounts receivable
4. Discounting of notes receivable

Pledge of accounts receivable

 Under pledge transactions, receivables are used as collateral security for loans. Pledge does not qualify as transfer of financial
assets for derecognition because the pledgor/borrower retains control over the pledged receivables. Therefore, receivables
pledged are neither derecognized nor specifically identified from other receivables.

 Pledge is treated as secured borrowing.

 No entry would be necessary with respect to the pledged accounts. Note disclosure in the notes to financial statements is
sufficient.

 Also known as general assignment of accounts receivable or hypothecation because all accounts receivable serve as collateral
security for the loan.

Assignment
 Under this form of receivable financing, a borrower (assignor) transfers rights in some accounts receivable to a lender
(assignee) in consideration for a loan. It is a formal type of pledging of accounts receivable. It is also known as specific
assignment because specific accounts receivable serve as collateral security for the loan.

 Assignment is also treated as secured borrowing. However, an entry is needed to specifically identify the assigned receivables
from other receivables. The assignor retains ownership of the accounts assigned.

 This may be done either on a non-notification or notification basis.

o When accounts are assigned on a non-notification basis, customers are not informed that their accounts have been
assigned. Therefore, the customers continue to make payments to the assignor, who in turn remits the collections
to the assignee.

o When accounts are assigned on a notification basis, customers are notified to make their payments to the assignee.

Presentation and Disclosure

 Assigned receivables are presented in the statement of financial position as regular receivables which is included under the
line item “trade and other receivables”. However, the equity in the assigned accounts shall be disclosed in the notes.

 The assigned receivable and the related loan are presented separately in the statement of financial position and are not
offset.

Factoring of accounts receivable

 A sale of accounts receivable to a factor (i.e., bank, financial institution) on a without recourse, notification basis.

 It differs from an assignment in that a company actually transfers ownership of the accounts receivable to the factor. Thus,
the factor assumes responsibility for uncollectible factored accounts.

FINANCIAL ACCOUNTING AND REPORTING (FAR) PROBLEMS

Problem 1:
On December 1, 2023, Echo Company assigned specific accounts receivable totaling P4,000,000 as collateral on a P3,000,000, 12% note
from Metrobank. In addition to the interest on the note, Metrobank also charged a 5% finance fee deducted in advance on the P3,000,000
value of the note. The December collections of assigned accounts receivable amounted to P2,000,000 less cash discounts of P100,000.
The company accepted sales returns of P150,000 on the assigned accounts and wrote off assigned accounts of P200,000.

1. What amount of cash was received from the assignment of accounts receivable on December 1, 2023?
2. What is the carrying amount of note payable on December 31, 2023?
3. What is the balance of accounts receivable – assigned on December 31, 2023?
4. What amount should be disclosed as the equity of Echo Company in assigned accounts on December 31, 2023?

1|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

Problem 2:
RX Company factored P2,000,000 of accounts receivable with a bank. The finance charge is 3% and 5% was retained to cover sales
discounts, sales returns and allowances.

1. What amount of cash was received on the factoring of accounts receivable?

2. What amount should be recognized as loss on factoring?

Problem 3:
VZ Company sold accounts receivable without recourse for P5,300,000. The company received P5,000,000 cash immediately from the
factor.

The remaining P300,000 will be received once the factor verifies that none of the accounts is in dispute.

The accounts receivable had a face amount of P6,000,000. The company had previously established an allowance for uncollectible
accounts of P250,000 in connection with such accounts.

What amount of loss on factoring should be recognized?

Problem 4:
On August 31, 2019, Prestige Crest Co. discounted (on a nonrecourse basis) at a bank a customer’s P600,000, 9-month, 10% note
receivable dated April 30, 2019. The bank discounted the note at 12% on the same date.

1. What amount of cash was received from the discounting?

2. What is the loss on note receivable discounting?

FINANCIAL ACCOUNTING AND REPORTING (FAR) THEORIES

1. Pledge transactions
A. Are disclosed only.
B. Are accounted for by segregating the pledged receivables from the other receivables through a journal entry.
C. Need not be disclosed if the related loan does not require any collateral security
D. A and B

2. Assignment of receivables
A. Are disclosed only
B. Are recognized by debiting accounts receivable-assigned
C. Give rise to receivables from factor
D. B and C

3. When specific accounts receivables are set up as collateral security for borrowings, the accounts receivable are
A. Pledged
B. Assigned
C. Factored
D. Discounted

4. It involves the outright sale of receivables to a financing institution known as a factor.

A. Pledging
B. Assignment
C. Factoring
D. Selling

5. What is "recourse" as it relates to selling receivables?

A. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
B. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
C. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the
sale.
D. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

6. A company factored accounts receivable without recourse with a bank. The company received cash as a result of this transaction
which is best described as
A. Bank loan collaterized by the company’s accounts receivable.
B. Bank loan to be repaid by the proceeds from the entity’s accounts receivable.
C. Sale of the company’s accounts receivable to the bank with the risk of uncollectible accounts retained by the company.
D. Sale of the company’s accounts receivable to the bank with the risk of uncollectible accounts transferred to the bank.

END OF HANDOUT

2|P a g e TSIY/RSORIANO/BVILLALUZ/JBINALUYO