Review of Intermediate Accounting Topics | Receivable Financing

Receivable Financing
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Receivable financing is the financial flexibility or capability of an entity to raise money out of its receiv- Accounts receivable 20,000,00
ables. 0

The entity in a financial distress may be forced to look for cash by financing its receivables. July 31 Loan payable – Bank 20,000,00
0
Forms of Receivable Financing Interest expense (20M × 12% × 6/12) 1,200,000
Cash 21,200,00
1. Pledge of accounts receivable 0
2. Assignment of accounts receivable
} Loan (Collateral = Receiv-
3. Factoring of accounts receivable able) Financial Statement Presentation on February 1, 20x1
4. Discounting of accounts receivable } Sale of Receivable Statement of Financial Position:
Current liabilities: Notes:
Pledge of Accounts Receivable Loan payable - Bank (6) 20,000,000

 The accounts receivable may be pledged as collateral security for the payment of loan. Notes to Financial Statements:
 Pledging od accounts receivable is general because all accounts receivable serve as collateral for Notes 6 – Loan payable - Bank
the loan. Accounts receivable of P30,000,000 are pledged to secure the loan.
 The borrowing entity makes the collections of the pledged accounts receivable but may be re-
quired to turn over the collections to the bank in satisfaction of the loan. Assignment of Accounts Receivable
 With respect to the pledge accounts, no entry would be necessary. It is sufficient that disclosure
thereof is made in a note to financial statements.  Assignment of accounts receivable means that a borrower called the ASSIGNOR that transfers
rights in some accounts receivable to a lender called the ASSIGNEE in consideration for a loan.
Problem Solving  Assignment of accounts receivable is a more formal type of pledging of accounts receivable.
 Assignment of accounts receivable is specific because specific accounts receivable serves as col-
Problem 1 lateral for the loan.

Kim Soo Hyun Company provided the following information in connection with a bank loan: Assignment of accounts receivable may be done either:
 February 1, 20x1 – Kim Soo Hyun borrowed P20,000,000 from the bank on a 6-month loan carry - 1. Nonnotification Basis, or
ing interest of 12%. Accounts receivable of P30,000,000 are pledged to secure the loan. 2. Notification Basis
 May 1, 20x1 – pledged accounts receivable of P10,000,000 are collected minus 2% discount.
 June 30, 20x1 – the remaining pledged accounts are collected. Nonnotification Basis
 July 31, 20x1 – the bank loan is paid plus interest.
Under nonnotification basis, customers are NOT INFORMED that their accounts have been assigned.
Prepare the journal entries to record the transactions.
Therefore, customers continue to make payments to the assignor (i.e., the entity), who in turn remits
Answer the collections to the assignee (i.e., bank).

Date Accounts Debit Credit Problem Solving

20x1
20,000,00 Problem 2.1
February 1 Cash
0
20,000,00 Mackenyu Maeda Corporation (MMC) provided the following transactions for the year 20x1:
Loan payable – Bank  April 1, MMC assigned P2,400,000 of accounts receivable to a bank in consideration of a loan. A
0
cash advance of 80% less service charge of P60,000 was made by the bank. It was agreed that
May 1 Cash (10M × 98%) 9,800,000 2% per month is to be made and the assignor continues to make the collection. MMC signed
Sales discount (10M × 2%) 200,000 a promissory note for the loan.
Accounts receivable 10,000,00  April 5, MMC issued a credit memo to a customer for returned merchandise, P90,000. The account
0 is one of the assigned accounts.
 April 10, MMC collected P1,500,000 of the assigned accounts less 2% discount.
June 30 Cash (30M – 20M) 20,000,00  May 1, MCC remitted the collections to the bank plus 2% interest for one month.

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Review of Intermediate Accounting Topics | Receivable Financing
 May 7, MMC assigned accounts of P30,000 proved to be worthless. Therefore, customers make payment directly to the assignee (i.e., bank).
 May 20, MMC collected P600,000 for the accounts assigned.
 June 1, MMC made final settlement with the bank. MMC accordingly remitted the total amount due Ther assignee (i.e., bank) gives notice to the assignor (i.e., entity) of the assigned accounts collected.
to the bank to pay of the loan plus interest charge.
Problem Solving
Required: Prepare journal entries to record the transactions.
Problem 2.2
Answers
Nijiro Murakami Corporation (NMC) assigned certain accounts receivable to a bank for a loan on the
Date Accounts Debit Credit following basis:
20x1  75% cash advance. The entity signed a promissory note for the loan.
April 1 Accounts Receivable – assigned 2,400,000  4% service charge on gross accounts receivable
Accounts Receivable 2,400,000  2% interest per month is to be charge
 The bank makes the collections
Cash [(2.4M × 80%) – 60K] 1,860,000
Service charge 60,000 (NMC) provided the following transactions for the year 20x1:
Notes payable (2.4M × 80%) 1,920,000  June 1 – received remittance upon the specific assignment of P15,000,000 in accounts to the
bank.
April 5 Sale Returns and Allowances 90,000  July 1 – received notice from the bank that P8,000,000 of the assigned accounts were collected. A
Accounts Receivable – assigned 90,000 check was sent to the bank for one month interest charge.
 August 1 – received notice from bank that assigned accounts of P5,000,000 were collected in full
April 10 Cash (1.5M × 98%) 1,470,000 and the remaining accounts of P2,000,000 were being returned.
Sales discount (1.5M × 2%) 30,000
Accounts Receivable – assigned 1,500,000 Accordingly, a check was received from the bank in settlement of the assignment contract. In making
the settlement, the bank deducted the interest charge for the corresponding period.
May 1 Notes payable 1,470,000
Interest expense (1.92M × 2%) 38,400 Required: Prepare journal entries to record the transactions.
Cash 1,508,400
Answer
May 7 Allowance for doubtful accounts 30,000
Accounts Receivable – assigned 30,000
Date Accounts Debit Credit
20x1
May 20 Cash 600,000
June 1 Accounts Receivable – assigned 15,000,00
Accounts Receivable – assigned 600,000 0
15,000,00
June 1 Notes payable (1,92M – 1.47M) 450,000 Accounts Receivable
0
Interest expense (450K × 2%) 9,000
Accounts Receivable 459,000 Cash [(2.4M × 80%) – 60K] 10,650,00
0
Accounts Receivable 180,000
Accounts Receivable – assigned
{ 180,000
Service charge 600,000
Notes payable (2.4M × 80%) 11,250,00
0
Accounts Receivable – assigned, April 1 2,400,000
Sales returns – April 5 (90,000) July 1 Notes payable 8,000,000
Collection – April 10 (1,500,000) Accounts Receivable – assigned 8,000,000
Worthless accounts – May 7 (30,000)
Collection – May 20 (600,000) Interest expense (11.25M × 2%) 225,000
Accounts Receivable – assigned, June 1 180,000 Cash 225,000

Notification Basis August 1 Accounts Receivable 2,000,000

Accounts Receivable – assigned 2,000,000
Under notification basis, customers are INFORMED that their accounts have been assigned.
Cash 1,685,000
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Review of Intermediate Accounting Topics | Receivable Financing
Notes payable (11.25M – 8M) 3,250,000
Interest payable (3.250M × 2%) 65,000
Accounts Receivable – assigned 5,000,000

Cash advance (15M × 75%) 11,250,000 Sale of goods on account

Service charge 600,000
Net proceeds 10,650,000 A/R xxx
Sale
Assigned accounts collected by the bank 5,000,000 xxx
Less: Amount applied to loan (11.25M – 8M) 3,250,000
Excess collection 1,750,000
Less: interest expense (3.25M × 2%) 65,000 M: Hello, bank! We are
Amount received by NMC 1,685,000 going to sell merchan-
The accounts receivable
dise to customer.
is sold by the MC imme-
Factoring of Accounts Receivable Please approve the
diately to the factor
sale.
(BANK) after shipment of
 Factoring is a sale is accounts receivable. B: Hello. This is ap- goods.
 In a factoring arrangement, an entity sells accounts receivable to a bank or finance entity called a proved. Please proceed
factor. the sale.
 The factor has the responsibility of keeping the receivable records and collecting the accounts.
 Forms of factoring: (1) casual factoring, and (2) factoring as a continuing agreement  Typically, the factor charges a commission or a factoring fee for its services of credit approval.
 The factor may withhold a predetermined amount as protection against customer returns and al-
Casual factoring lowances and other special adjustments. This is also known as factors holdback.
 Casual factoring means the normal sale of accounts receivable.
 If the entity finds itself in a critical cash position, it may be forced to factor some or all of its ac- Problem Solving
counts receivable.
Problem 3.1
Problem Solving
Dori Sakurada Corporation or DSC provided the following transactions for the current year:
Problem 3.1  November 1 – sold merchandise to a customer for P375,000, terms 2/10, n/30.
 November 3 – factored the accounts to a bank. The bank charged a 5% service fee and a 25% fac-
Yuri Tsunematsu Corporation (YMC) finds itself in a critical cash position. To obtain the needed cash to tor holdback.
pay its obligations, YMC was forced to factor P300,000 of its accounts receivable with an allowance for  November 9 – granted a customer a credit allowance of P37,500 for damage in the shipment.
bad debts of P15,000 for P240,000. Prepare the journal entries to record the casual factoring of ac-  November 11 – the customer paid in full its account to the bank.
counts receivable.  November 15 – final settlement was made with the bank.

Answer Prepare the entries to record the transactions.

Gain or loss on sale Answer

Cash proceeds 240,000
Less: Carrying amount of accounts receivable 285,000 Journal entry:
Loss on sale (45,000) November 1 Accounts Receivable 375,000
Sales 375,000
Journal entry to record the factoring:
Cash 240,000 November 3 Cash 255,000
Loss on factoring 45,000 Sales discount (375K × 2%) 7,500
Allowance for bad debts 15,000 Service fee (375K × 5) 18,750
Accounts receivable 300,000 Receivable from factor (375K × 25%) 93,750
Accounts Receivable 375,000
Factoring as a Continuing Agreement
 Factoring may involve a continuing agreement where a finance entity purchases all accounts re- November 9 Sales returns and allowances 37,500
ceivable of a certain entity. Sales discount (37.5K × 2%) 750
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Review of Intermediate Accounting Topics | Receivable Financing
Receivable form factor 36,750

November 15 Cash (93,75K – 36.75K) 57,000

Receivable from factor 57,000

Gross accounts receivable factored 375,000

Sales discount (375K × 2%) (7,500)
Bank service fee (375K × 5%) (18,750)
Factor holdback (93,750)
Net cash proceeds from factoring 255,000

References
 Valix, C., & Peralta, J. (n.d.). Intermediate Accounting 2020 Edition (Vol. 1).
 Millan, Z. V. (n.d.). Intermediate Accounting Part 1A 2021 Edition.

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