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DISCOUNTING OF NOTE RECEIVABLE (AutoRecovered)

1. Discounting of notes receivable occurs when a payee needs cash before the maturity date of a note and sells the note to a financial institution like a bank at a discounted price. 2. The bank provides immediate cash but charges a discount since it has to wait until the note's maturity date to collect from the issuer. 3. Key terms include maturity value, carrying amount, discount, net proceeds, and gain/loss which are used to calculate the financial effects of discounting the note.

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71 views

DISCOUNTING OF NOTE RECEIVABLE (AutoRecovered)

1. Discounting of notes receivable occurs when a payee needs cash before the maturity date of a note and sells the note to a financial institution like a bank at a discounted price. 2. The bank provides immediate cash but charges a discount since it has to wait until the note's maturity date to collect from the issuer. 3. Key terms include maturity value, carrying amount, discount, net proceeds, and gain/loss which are used to calculate the financial effects of discounting the note.

Uploaded by

Loydifer ..
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DISCOUNTING OF NOTE RECEIVABLE

When a note is negotiable, the payee may obtain cash before maturity date at a bank or other financing
company.  Discounting on Note Receivable happens when the holder (payee of the note or lender)
needs cash before the maturity date of the note and decides to sell them to financial institution (bank)
at a lower price.  The bank will be given a discount since they will have to pay to the lender
immediately while wait until the maturity date of the note before receiving payment from the issuer of
the note for the maturity value. 

Notes receivable are negotiable if it is a transferable instrument through selling the ownership to


someone else. The new bearer or holder of the note would have the same claim on the note as the
original payee had.

Discounting of Note Receivable is a convenient way for a business or individual to cash in on a note at
any time before maturity. To discount the note, the payee must endorse it. The payee then becomes
the endorser; the bank or other financing company becomes the endorsee.

Explanation:

Yung Debtor ( nagpautang ): Endorser

Promissory notes: Yung inendorse

Yung banko: Endorsee

With recourse: Kapag with recourse kapag hindi nagbayad ng utang yung umutang (dinishonor) ang
magbabayad ng utang sa bangko ay ang company ( or yung nagpautang )

Without recourse: di sagutin nung endorser or yung nagpautang if ever idishonor ng umutang yung
note.

It should be noted that the transactions in the Discounting of Note Receivable by the Payee will not
affect the Debtor's record.  As far as the Debtor is concern, there is only a change on recipient of his
payment at maturity date, from the Endorser (Payee) to Endorsee (Bank).

Example:  When the Payee discounted the Note with Rural Bank, the Payee receives the proceeds of the
note from the Rural Bank at discounted price. In return, the Rural Bank will be the new payee of the
Promissory Note and will receive the maturity value of the note at maturity date from the Issuer of the
Note (Debtor).

Terms Related to Discounting of Note

1.  Maturity Value - refer to the value of the note at maturity date.  It is computed as:

Maturity Value (MV)  =  Principal (P)   +  Interest (I)

MV  =  P  +  I  (full period of the note)


2.  Carrying Amount – refer to the value of the note at the date of discount.  It is computed as:

            Carrying Amount (CA) = Principal (P)  +  Accrued Interest (AI), earned interest from issue date to
discount date.

CA   =  P  +  AI 

3.  Discount – amount deducted by the Lender from the Maturity Value of the note. Discount is the cost
charged by the Lender to Endorser for waiting to receive the payment on maturity date.

            Discount (D) = Maturity Value (MV)  x Discount Rate (DR) x Discount Period (DP)

 D  =  MV  x  DR  x  DP

Discount Rate (DR) – rate used by the bank in computing the discount. If no discount rate is given, it is
safe to assume that it is equal to the interest rate.

Discount Period (DP) - period of time from date of discounting to maturity date. Simply computed,
discount period equals term of note minus expired portion up to the date of discounting. It is
the unexpired term of the note.

4.  Net Proceeds – refer to the discounted value paid by the Endorsee (Lender /Bank) to Endorser
(Payee) for the discounting of the notes receivable. It is computed as follows:

            Net proceeds (NP) = Maturity Value (MV) minus Discount (D)

                                   NP  =  MV  -  D

5.  Gain or Loss from Discounting - the discounting of the note may provide a gain or loss to the endorser
of the note at the date of discounting.  This is computed by getting difference between the Carrying
Amount of the note and Net Proceeds:

Gain or Loss  =  Net Proceeds  -  CA

If Net Proceeds is more than CA there is Gain         

If Net Proceeds is less than CA there is  Loss

Steps in Discounting Notes Receivable


1.  Compute the Carrying Amount (CA).
2.  Compute for the Discount (D).
3.  Determine for the Net Proceeds (NP).
4.  Determine the Gain or Loss on Discounting (G/L).
Refer to the example below: (mas Madali inintindihin pag pinanood mo ito)

Illustration of the Steps and Computations in the Discounting of Notes Receivable:

Recording the transactions on the Discounting of Note Receivable:

Summary of Journal Entries:

1.  On October 14, the recognition of Notes Receivable from the sales transactions with Customer X.

2.  On November 10, the discounting of notes receivable with the bank.

3.  On April 12, the transaction if Customer X will honor payment of the note to the bank or not.

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