ACC 124 WEEK 8 TO 9 TOPICS

✓ Notes Receivable
✓ Loans Receivable
✓ Receivable Financing

CHAPTER SUMMARY – Notes Receivable (Interest Bearing)

1. Notes receivable is supported by formal document known as the promissory note.
2. The following are the parties in a promissory note:
a. Maker – the one who makes and signs the promissory note. This is the party who obligates itself to
pay cash to the payee on maturity date.
b. The payee – the beneficiary of the promissory note. This is the party who will receive the cash from
the maker on maturity date, hence it recognizes notes receivable.
3. Initial and subsequent accounting procedures will depend on the characteristics of notes receivables:
Interest-Bearing Interest-Bearing Stated
Stated Rate = Market Rate ≠ Market Rate Non-interest Bearing
Rate
Initial measurement At face amount At present value of cash flows discounted using market
rates on initial recognition
Interest income Based on stated rate Based on market rate on initial recognition applied to
applied to face beginning-of-the-period carrying amount
amount
Carrying amount each Based on remaining The present value amounts appearing in the amortization
reporting date face amount table
Recognition of accrued Based on stated rate Not applicable (no stated rate)
interest receivable
4. Interest bearing promissory notes can be classified as either term or serial:
a. Term – the whole face amount is payable on maturity date.
b. Serial – the face amount is periodically payable before maturity date.
5. The interest income is the same every year for term notes but decreasing for serial notes.
6. Accrued interest receivable can be determined as: Beginning-of the-period carrying amount x Interest rate x
Time. Time is counted from the immediately preceding interest payment date up to reporting date.
7. The frequency (e.g., annually, quarterly, etc.) of interest payments greatly affects the amount of accrued
interest receivable.
8. The face amount of a non-trade notes receivable that will be received within 12 months after the reporting
date is classified as current.
9. In compounding interest, accrued interest receivable earns interest income.

ILLUSTRATION 1 – TERM NOTES

On January 1, 2023, SAN Francisco Company received a promissory note with face amount of P1,000,000 from
one of its customers who is unable to pay its P1,000,000 account within the credit period. The note bears 10%
interest and matures on December 31, 2024. Interest is payable every December 31 of each year. Determine the
journal entries to be made in 2023 and 2024 related to this promissory note.

ILLUSTRATION 2 – SERIAL (INSTALLMENT) NOTES

At the beginning of 2023, SAN ANDRES Company sold its land with carrying amount of P3,600,000 by receiving
the note receivable with face amount of P4,500,000. This note is payable in installments of P1,500,000 every
December 31, starting in 2023. Interest of 12% is also payable at the same time as the principal installment
amounts. Required: Determine the journal entries to be made in 2023 and 2024 related to this promissory note.

ILLUSTRATION 3 – TERM NOTES

On April 1, 2023, Mauban Company received a five-year promissory note with face amount of P2,000,000 for the
amounts lent to another entity. The note bears interest of 11%. Required: Under each of the following
independent scenarios, determine the amount of accrued interest receivable as of December 31, 2024:

a. Interest is payable every March 31, starting in 2024.

b. Interest is payable every March 31 and September 31, starting on September 30, 2023.

CHAPTER SUMMARY – NOTES RECEIVABLE (SUBJECT TO PRESENT VALUE)

1. Non-interest-bearing promissory notes are initially measured at their fair values, which is equal to the
present value of cash flows discounted using market rate on initial recognition.
2. The present value is determined as Amount of cash flow x PV factor.
3. The PV factor to be used will depend on the amounts and frequency of cash flows:
PV Factor of Single Payment PV Factor of Ordinary Annuity PV Factor of Annuity Due
Generally, for term notes Generally, for serial installment Generally, for serial installment
receivable. Can be used for notes receivable to be received notes receivable to be received
some serial notes where the in equal installment amounts in equal installment amounts in
installment payments are inequal interval at the end of equal interval at the beginning
unequal and/or intervals are each period. of each period.
unequal.

Cash flow is amount is equal to Cash flow amount is equal to Cash flow amount is equal to
face amount. periodic installment amount. periodic installment amount.
4. When using PV factor of single payment, the present value can be computed as Face amount of the note x
PV factor of single payment.
5. When using PV factor of ordinary annuity or annuity due, the present value can be computed as the periodic
cash flows x PV Factor of ordinary annuity or annuity due.
6. The subsequent measurement shall use the effective interest method by using an amortization table.
7. Interest income is equal to effective interest rate x beginning of the period carrying amount of the note
receivable.
8. Carrying amounts as of each reporting date are usually equal to the amortized cost in the amortization table.
9. The carrying amount of a term noninterest-bearing notes receivable can either be current or noncurrent but
not both.
10. The carrying amount of a serial non-interest-bearing notes receivable can be split into current and
noncurrent portions. Current portion is equal to the amount of amortization in the succeeding year.
11. Interesting-bearing note receivable with stated rate not equal to market rate is also subject to present value
calculations.
12. The amount of day 1 loss will be recouped as amounts of interest income during the term of the note.

ILLUSTRATION 1 – TERM NOTE (SUBJECT TO PRESENT VALUE)

On January 1, 2023, LUCBAN COMPANY received a four-year note from the buyer of its land with carrying
amount of P4,000,000. The note has a face amount of P7,500,000 and is payable on maturity date. There is no
stated rate but the market rate on January 1, 2023 averaged 9%.
Requirement:
a. Amortization table
b. Necessary journal entries
 c. Determine the current and noncurrent portion of notes receivable as of December 31, 2024.

ILLUSTRATION 2 – SERIAL NOTE (SUBJECT TO PRESENT VALUE)

At the beginning of 2023, TAYABAS Company received a five-year, noninterest-bearing promissory note with
face amount of P5,000,000 from the selling of its equipment with cost of P6,000,000 and accumulated
depreciation of P1,500,000. The note’s face amount is payable in equal annual installments of P1,000,000
every December 31, starting in 2023. Market rates at the start of 2023 averaged 10%.

Requirement:

a. Amortization table
b. Necessary journal entries
c. Amount of gain or loss to be recognized during 2023.
d. The amount of interest income to be recognized during 2024.
e. The carrying amount of notes receivable as of December 31, 2024.
f. Determine the current and noncurrent portion of notes receivable as of December 31, 2024.

ILLUSTRATION 3 – SERIAL NOTE (STATED RATE ≠ MARKET RATE, SUBJECT TO PRESENT VALUE)

SAMPALOC Company sold one of its lands, with carrying amount of P5,500,000, on January 1, 2023 for a total
price of P9,000,000. The Company received P2,000,000 downpayment and a 6% interest-bearing promissory
note for the remainder of the total price. The note’s face amount is payable on December 31, 2025 and its
interest is payable every December 31 of each year. Market rates on initial recognition averaged 11%.

Requirement:

a. Amortization table.
b. Necessary journal entries.
c. Amount of gain or loss to be recognized during 2023.
d. The amount of interest income to be recognized during 2024.
e. The carrying amount of notes receivable as of December 31, 2024.
f. Determine the current and noncurrent portion of notes receivable as of December 31, 2024.

CHAPTER SUMMARY – LOANS RECEIVABLE

1. Generally, loans are private contracts while bonds are public contracts. As such, bonds are usually sold in
bond exchange (i.e., easy transfer among investors) while loans cannot be easily transferred from one
investor to another.
2. In the Philippine setting, loans are usually accounted for at amortized cost. However, depending on the
circumstances, loans may be accounted for at FVTPL or FVTOCI.
3. The initial measurement of loan receivable is as follows: Face amount + direct cost origination cost incurred
– origination fees received. Indirect origination costs are expensed outright. Face amount is also the
principal amount.
Origination costs Origination fees
Amounts actually incurred by an entity in relation Amounts charged by a lender entity to the
to checking of creditworthiness of a prospective borrower to compensate the former for the
borrower. origination activities that it had undertaken prior
to the granting of the loan. These fees are normally
These may include but not limited to: stated as percentage of the loan amount.
• Legal costs;
• Documentation costs;
 • Background checking costs;
• And other agency costs.

In accounting, origination costs are classified as

either direct origination costs and indirect
origination costs.

4. The relationship between direct origination costs and origination fees received has the following
accounting consequences:
Consequences
Scenarios Initial carrying amount vs face Premium or Discount on initial
amount recognition
Direct origination costs > Initial carrying amount > face Premium
origination fees amount
Direct origination costs < Initial carrying amount < face Discount
origination fees amount
5. In exceptional circumstances, loans may require equal periodic payments (inclusive of principal and
interest portions). In these cases, the periodic payment can be computed as follows:
Equal Periodic Payment = Principal Amount / PV of Ordinary Annuity.

ILLUSTRATION 1 – PREMIUM
On January 1, 2023, LIVERPOOL Bank lent P2,500,000 loan with a maturity date of December 31, 2028. The
loan has interest of 10% per year and payable every December 31 of each year. The bank incurred direct
origination costs of P295,760 while it charged the borrower a 5% origination fee. Indirect origination costs
amounted to P56,980. After considering the relevant integral costs and fees, the effective interest rate is
8.50%.
Required:
a. Amortization table
b. Necessary journal entries
c. Determine the ending balance of premium on loans receivable as of December 31, 2025.
d. Determine the carrying amount loans receivable as of December 31, 2025.
e. How much is the interest income for year 2025.
f. How much is the current and noncurrent portion of loans receivable as of December 31, 2025.

ILLUSTRATION 2 – DISCOUNT
On January 1, 2023, MANCHESTER Bank lent P3,000,000 loan with a maturity date of December 31, 2026.
The loan has interest of 9% per year and will be payable every December 31 of each year. The bank
incurred direct origination costs of P500,000 while it charged the borrower origination fee of P686,147.
Indirect origination costs amounted to P117,065. After considering the relevant integral costs and fees,
the effective interest rate is 11%.

Required:

a. Amortization table
b. Necessary journal entries
c. Determine the ending balance of discount on loans receivable as of December 31, 2024.
d. Determine the carrying amount of loans receivable as of December 31, 2024.
e. How much is the interest income for the year 2024.
 f. How much is the current and noncurrent portion of loans receivable as of December 31, 2025.

ILLUSTRATION 3 – INSTALLMENT PAYMENTS OF LOAN PRINCIPAL

On January 1, 2023, CHELSEA Bank lent P4,000,000 loan with a maturity date of December 31, 2026. The
loan has interest of 11% per year and payable every December 31 of each year. In addition, annual
payments of principal amounting to P1,000,000 will be paid every December 31 of each year, starting with
December 31, 2023. The bank incurred direct origination costs of P319,779 while it charged the borrower
origination fee of 10% of the principal amount. After considering the relevant integral costs and fees, the
effective interest rate is 12%.

Required:

a. Amortization table
b. Necessary journal entries
c. Determine the carrying amount of the loan on January 1, 2023.
d. Determine the ending balance of discount on loans receivable as of December 31, 2024.
e. Determine the carrying amount of loans receivable as of December 31, 2024.
f. How much is the interest income for the year 2024.
g. How much is the current and noncurrent portion of loans receivable as of December 31, 2025.

CHAPTER SUMMARY – RECEIVABLE FINANCING PLEDGE AND ASSIGNMENT

1. Receivable financing methods accelerate the availability of cash from the entity’s receivables.
2. In pledging, the general balance of accounts receivable serves as the collateral for the related loan. Accounts
receivable is not derecognized and no gain or loss shall be recognized from the pledged receivables.
3. In pledging, the proceeds are recognized as a separate liability. Related interest expense shall also be
recognized separately.
4. In assignment, specific accounts receivable serve as the collateral for the related loan. The amount loan to
the entity is usually less than 100% of the assigned accounts receivable balance to account for possible
returns, discounts, and write-offs.
5. The amount of proceeds from assignment is determined as Proceeds = (Assigned Accounts Receivable x %
Loaned) – Finance or Service Charge.
6. Assigned accounts receivable are not derecognized but transferred to a separate accounts receivable
account (i.e., Accounts Receivable – Assigned).
7. Assignments can either be made through notification or non-notification basis.
8. If the assignment is made through notification basis, the debtors shall pay the bank directly instead of the
entity. Any excess collection of the bank shall be returned to the entity.
9. If the assignment is made through non-notification basis, the debtors shall continue to pay the entity, but
the payments are required to be periodically remitted to the bank.
10. Equity from assigned receivables is equal to the balance of assigned receivables less the balance of the
related borrowing.
11. If a sale is made through the customer’s credit card, the receipt of cash is accelerated since the credit card
issuer (i.e., a bank) pays the entity sooner than the customer normally could.

ILLUSTRATION 1 – PLEDGING
On January 1, 2023, SAJOLAN Company borrowed P2,000,000 from the bank. The loan matures on December 31,
2023 and bears 12% interest. To persuade the bank to lend the Company in the first place, the Company pledged
all of its accounts receivable with carrying amount of P4,500,000.
Required: Provide the necessary journal entries.
ILLUSTRATION 2 – ASSIGNMENT
PAOLO Company assigned P3,000,000 of its accounts receivable on June 1, 2023. The bank lent 80% of the
accounts receivable and charged P10,000 service fee. The loan will mature after one year together with 12%
interest. Also, the following are the transactions for the month of June 2023:
a. June 10 2023 – P1,000,000 assigned accounts were received less P20,000 sales discount. In addition, P800,000
unassigned accounts were received.
b. June 15, 2023 – P30,000 assigned accounts were written off.
c. June 22, 2023 – P50,000 assigned accounts were issued with credit memo due to returns.
Application of collections from assigned receivables against the loan payable is made at the end of each month.
Required: Provide the necessary journal entries under (1) notification and (2) non-notification basis.

ILLUSTRATION 3 – ASSIGNMENT (COMPREHENSIVE)

SAN JOSE Company assigned a P5,000,000 of its accounts receivable to a bank on March 1, 2023. The bank
advanced 70% of the accounts receivable less P30,000 service charge. The loan bears 9% interest. Over the next
three months, the following transactions involving the assigned accounts were noted:
a. March 21, 2023 – P2,000,000 assigned accounts were collected.
b. March 27, 2023 – P500,000 assigned accounts were collected.
c. April 10, 2023 – P800,000 assigned accounts were collected.
d. May 15, 2023 – P750,000 assigned accounts were collected.
Required: Provide the necessary journal entries under (1) notification and (2) non-notification basis.

ILLUSTRATION 4 – CREDIT CARD TRANSACTIONS

On June 15, 2023, VILLAVER Company sold P900,000 worth of goods to a customer. That customer presented a
credit card issued by BPI. On June 20, 2023, the Company obtained payment from BPI, less 0.5% service charge.
Required: Provide the necessary journal entries.

CHAPTER SUMMARY – FACTORING AND DISCOUNTING

1. Factoring is a form of receivable financing involving the “selling” of receivables.
2. As to frequency, factoring can either be casual factoring (i.e., one-time factoring) or regular factoring (i.e.,
continuous factoring).
3. As to the liability of the entity related to the factored accounts, factoring can either be without recourse (i.e.,
the entity is not liable) or with recourse (i.e., the entity is still liable).
4. The proceeds from factoring can be determined a follows:
5. In factoring, the factored receivables are derecognized and the difference between the proceeds and the
carrying amount of factored receivables is recognized in profit or loss.
6. In factoring with recourse, a recourse obligation shall be recognized at its fair value. This has the effect of
increasing the loss to be recognized from factoring.
7. Discounting is a form of notes receivable financing involving the “selling” of receivables.
8. The proceeds from discounting of notes receivable can determined as follows:
9. The gain or loss on discounting shall be determined as the difference between the following:
10. There are three forms of discounting of notres receivable: without recourse, conditional sale, and
secured borrowing. Their primary difference arises from the entity’s liability in case the maker of the note did
not pay the bank.
11. Conditional sale and secured borrowing will make the entity still liable to the bank.
12. The account to be credited for discounting without recourse is the notes receivable account; for
conditional sale, it is the notes receivable discounted account; and for secured borrowing, it is the loan
payable account.
ILLUSTRATION 1 – CASUAL FACTORING WITHOUT RECOURSE
As of January 15, 2023, an entity had a very small amount of cash, but it needs to pay a large short-term
obligation maturing on January 20, 2023. Due to this financial constraint, as of the same date, the entity sold
P500,000 of its accounts receivable for P420,000, with all the risks and rewards assumed by the factor. Related
allowance for bad debts for the factored accounts amounted to P45,000.
a. Provide the necessary journal entries.
b. How much is the net proceeds from factored accounts receivable?
c. How much is the loss on factoring?

ILLUSTRATION 2 – REGULAR FACTORING WITHOUT RECOURSE

JUNTILLA Company factored P3,000,000 of its accounts receivable without recourse. The factor withheld 15%
of the accounts receivable and charged 5% service charge. In addition, advance annual interest of 12% are
deducted based on the 45-day expected average period before the customers fully pay the factor.
Required:
a. Provide the necessary journal entries.
b. How much is the net proceeds from factored accounts receivable?
c. How much is the loss on factoring?

ILLUSTRATION 3 – REGULAR FACTORING WITH RECOURSE

Using the previous information in JUNTILLA Company, except that the factoring is without recourse, Recourse
liability had fair value of P400,000 on the same date.
Required:
a. Provide the necessary journal entries.
b. How much is the net proceeds from factored accounts receivable?
c. How much is the loss on factoring?

ILLUSTRATION 4 – DISCOUNTING OF NOTE

On January 1, 2023, TALUGTUG Company received a 9% interest bearing promissory note, with P4,000,000 face
amount, from one of its customers. The note will mature on September 30, 2023. The note was discounted on
April 1, 2023 at a 12% discount rate. Required: Determine the net proceeds from the discounting.

ILLUSTRATION 5 - DISCOUNTING OF NOTE (WITHOUT RECOURSE, WITH RECOURSE – CONDITIONAL SALE,

WITH RECOURSE – SECURED BORROWING)
On September 1, 2023, CAIN Company received an 11% interest-bearing promissory note with face amount of
P3,000,000 and maturity date of August 31, 2024. Required: Assuming that on October 31, 2023, the Company
discounted it with a bank at a 14% discount rate, record the journal entry each of the following independent
scenarios:
1. Discounting is without recourse
2. Discounting is with recourse and considered as conditional sale
3. Discounting is with recourse and considered as a secured borrowing
4. Continuing Scenario’s 1 and 2, assuming that on August 31, 2024, the maker did not pay the bank, and that
the Company became liable to pay the maturity value and P400,000 protest fee to the bank. And on
December 1, 2024, the maker paid its obligation to the Company, plus 11% interest.

- END OF HANDOUT –
“Doubt kills more dreams than failure ever will.” – Suzy Kassem