Receivable Financing

Maturity value= Principal plus intereSI for the "full" term ofthe

~

Interest= Principal times interest rate times the full term ofthe Discount= Maturity value times discount rate x discount penOd. . llote,

Problem 13-10 (AICPAAdapted) On July 1, 2011, Lee Company sold goods in exch P2,000,000, 8-month, ooninterest-bearlng note receivabfge for time of the sale, the note's market rate of interest was 12;· At the amount did Lee receive when it discounted the note at ;- ~hat September I, 20 II? OYo on a. 1,940,000 b. 1,938,000 C. 1,900,000 d. 1,880,000

'Y 2. What is the loss on note receivable discounting? a. b. c. d.

50,000 40,000 52,000 12,000

Solution 13-11 Question 1 Answer c Principal Add : Interest (1 ,000,000 x 8% x 6/12)

1,000,000 40,000

Maturity value Less: Discount {1,040,000 x 10% x 6/12)

1,040,000 52,000 988,000

Net proceeds

Solution 13-10 Answer c Principal Less: Discount (2,000,000 x 10% x 6/12) Net proceeds

2,000,000 100,000 1,900,000

-

The note is noninterest-bearing. Therefore, the maturity value is equal to the principal or face value of the note.

Question 2 Answer d Net proceeds Carrying amount of note receivable - equal to principal

988,000 (1,000,000)

Loss on note receivable discounting

(

12,000)

Problem 13-12 (AICPAAdapted)

The note is dated July 1, 2011 and it was discounted on September l, 2011 and therefore, 2 months already expired. Since the term ofthe note is 8 months, the unexpired term is 6 months.

On June 30, 2011, Ray Company discounted at the bank a customer's

Problem 13-11 (AICPAAdapted)

I. What is the amount received from the note receivable discounting?

Apex Company accepted from a customer P1,000,000 face amoun~ 6-month, 8% note dated April 15, 2011. On the same date Apex discounted the note without recourse at Union Bank at a 10% discount rate. 1. What amount ofcash was received by Apex from the discounting? a. 1,040,000 b. 990,000 C. 988,QQQ d. 972,000 232

P6,000,000, 6-month, 10% note receivable dated April 30, 2011 . The bank discounted the note at 12% without recourse. a. 5,640,000 b. 5,760,000 C.

6,048,000

d. 6,174,000 2. What is the loss on note receivable discounting? a. 252,000 b. 152,000 C.

52,000

d.

48,000 233

Solution 13-12

50 /ution 13-13 Answerd

Question J Answer c 6,00Q Oo

Principal Add: Interest (6,000,000 x 10% x 6112 )

~

Maturity value . Less: Discount (6,300,000 x 12% x 4/ 12)

6,300 00() ~

6,048 ooo ~ The note is datedApri130, 2011 an? it was dis~o~nted June 30, 201 Therefore, two months already expired. The ongmaJ tenn is 6 m ~ and accordingly, the unexpired tenn is 4 months. ont

principa l Add : Interest (500,000 x 10%) Maturity value Less : Discount (550,000 x 12% x 6/12)

550,,000 33,000

Net proceeds

517,000

Net proceeds

6,000,000

Carrying amount of note receivable

6,100,000

100,000

Net proceeds Carrying amount of note receivable

6,048,000 (6,100,000)

Loss on note receivable discounting

(

Only the balance of P500,000 on December 31, 20 IO was discounted because the first installment of PS00,000 was paid on said date. This balance of P500,000 matures on December 31 , 20 I 1 and therefore the corresponding interest is for one year from December 31, 20 I? to December 31, 201 I. However, the discount period is only 6 months because the note was discounted on July 1, 2011 .

Question 2 Answer c Principal Accrued interest receivable (6,000,000 X JO% X 2/12)

)00,000 50,000

Problem 13-14 (AICPAAdapted)

Rand Company accepted from a customer a P4,000,000,' 90-day, 12% interest-bearing note dated August 31, 20 I I. On September 30, 2011, Rand discounted the note with recourse at the Apex State Bank at 15%. However, the proceeds were not received until October I, 20 I I.

52,000)

The discounting with recourse is accounted for as a conditional sale with recognition ofa contingent liability.

Problem '13-13 (AICPAAdapted)

On July 1,2010, Kay Company so!d equipment to Mando Comp~y for Pl,000,000. Kay accepted a 10% note receivable for the entlfe sales price. This note is payable in two equal installments ofPS00,000 plus accrued interest on December 31,201 Oand December 31, 2011.

I. What is the amount received from the discounting ofnote receivable? a. b. c. d.

On July 1, 2011, Kay discounted the note at a bank at an interest rate ofl2%.

4,017,000 4, I20,000 4, l 03,000 3,965,500

2. What is the loss on note receivable discounting?

Whatreceivable? is ~e amount received by Kay Company from the discounting of note a. 484,000 b. 493,500 C. 503,500 d. 517>000

a. b. c. d.

40,000 23,000 I 7,000 20,000 23:i

234

I

1 . 1-----/

problem 13-16 (IAA)

Solution 13-14 Question 1Answer a Principal ·Interest (4,000,000 x 12% x 90/360) Maturity value Less: Discount (4,120,000 x 15% x 60/360)

4,000,000 12

---

4,120,000

~ 4,017

Net proceeds

The note is dated August 31, 2011 and it was discounted on September 30, 2011 and therefore, 30 days already expired Accordingly, the discount period or unexpired term is 60 days. · Question 2 Answer b

On August 31, 2011, Sunflower Company discounted with recourse a customer's note at its bank at discount rate of 15%. The note was received from the customer on August I, 2011, is for 90 days, has a face value of PS,000,000, and carries an interest rate of 12%. The customer paid the note to the bank on October 30, 2011, the date of maturity. Ifthe discounting is accounted for as a secured borrowing, what is the interest expense to be recognized on August 31, 2011?

a. 50,000 b. 21,250 c. 28,750

Principal 4,000,000 Accrued interest receivable (4,000,000 x 12% x jQ/360) 40,000

d. 25,000

Carcying amount of note receivable

4,040,000

Solution 13-16 Answer c

Net proceeds Carrying amount of note receivable

4,017,000 (4,040,00o;

Loss on note receivable discounting

( 23,000)

Problem 13-15 (AICPAAdapted)

On November 1, 2011, Davis Company discounted with recourse at 10% a one-year, noninterest bearing, P2,050,000 note rece~vable maturing on January 31, 2012. The discounting ofthe note receivable is accounted for as a conditional sale with recognition of a continge~t liability. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2011? .a. 2,050,000 b. 2,000,000 c. 2,033,333 d. 0

(5,000,000 x 12% x 90/360)

5,000,000 150,000

Maturity value Discount (5,150,000 x 15% x 60/360)

5,150,000 128,750

.Net proceeds

5,021,250

Principal Accrued interest receivable (5,000,000 x 12% x 30/360)

5,000,000 50,000

Carrying amount of note receivable

5,050,000

Net proceeds Carrying amount of note receivable

5,021,250 (5,050,000)

Interest expense

( 28 1750)

Principal Interest

Solution 13-J 5 Answer a

Thenote conting~nt liabi!ity is.equal to the principal or face valu.e of the receivable discounted. 236

237

Problem 13-17 (IAA)

50 /ut ion 13-17

On January 1, 2011, Cactus Company sold land with canying amount of P 1,500,000 in exchange for a 9-month, 10% note with face value of P2,000,000 . The 10% rate properly reflects the time value of money for this type of note.

Question I Annver b

On April 1, 2011, Cactus Company discounted the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted for as a secured borrowing. On October 1, 20J 1, the maker dishonored the note receivable. Cactus Company paid the bank thematurityvalueofthe note plus protest fee of PI0,000. On December 31, 2011, Cactus Company collected the dishonored note in ful) plus 12% annual interest on the total amount due. I. What is the amount of proceeds received by Cactus Company from the discounting ofnote receivable? a. 2,150,000 b. 2,021,000 C. 2,050,000 d. 1,921,000

principal Interest

(2 ,000,000 x 10% x-9/12)

Maturity value Discount (2 , 150,000x 12%x6/12)

2,150,000 ( 129,000)

Net proceeds

2,021,000

Question 2 Answer b Principal Accrued i ntcrcst receivable (2 ,000,000 x 10% x 3/ 12)

2,000,000 50,000

Carrying amount of note receivable

2,050,000

Net proceeds Carrying amount of note receivable

2,021 ,000 (2,050,000)

Interest expense

(

29 ,000)

Question 3 Answer h

2. What is the interest expense to be recognized by Cactus Company on April I, 2011?

a. 50,000

Maturit y value Pro te st fee

2,150,000 10,000

Total amount due Interest (2,160,000x 12%x3/12)

2,160,000 64,800

Amount collected from customer

2,224,800

b. 29,000 C. 21,000 d. 25,000

3. What is the amount co11ected by Cactus Company fr9m the customer on December 31, 2011? a. b. c. d.

2,000,000 150,000

2,150,000 2,224,800 2, l60,000 2,214,500 ., '2Q

239

\..

Problem 13-18(AICPAAdapted)

problem 13-19 (AICPAAdapted)

?n August I, 2011, Vann Company's PS,0_00,000 one-year interest-bearing note due July 31, 2012, was discounted at Ho ' non. Bank at 10.8%. Vann uses the straight line method of arn:~t~aci 21 discount. What amount should Vann ~eport _f?r note payable ~ ~g December 31, 2011 ·statement of financial pos1tton? •nits

Brooke Con:ipany discounted its own P5,000,000 one-year note at a bank, at a d1scou~t rate of 12%, when the prime rate was 10%. In porting the note m Brooke's statement of financial position prior to

a. 5,000,000 b. 4,775,000 C, 4,685,000 d. 4,460,000·

:aturity, what rate should Brooke use for the recordins of interest expense?

a. 10.0% b. 10.7%

c. 12.0% d. 13.6%

Solution 13-18 Answer c Note payable Less: Discount (5,000,000 x 10.8%)

Net proceeds

4,460,000

Actually, Vann Company borrowed from the bank and issued a note for the loan. Thus, this is a case of "discounting own note". If the transaction is recorded, the pertinent entries for2011 are:

Solution 13-19 An~wer d Note payable Discount (5 ,000,000 x 12%) Net proceeds

Effective interest rate

5,000,000 ( 600.000) 4,400,000

Discount/ Net proceeds = 600,000 / 4,400,000 = 13.6% =

I . To record the loan on August 1, 2011 : Cash

4,460,000 • 540,000

Discount on note payable Note payable

5,000,000

2. To amortize the discount as interest expense for 5 months from August 1 to December 31, 2011 : Interest expense (540,000 ~ 5/12)

225,000

Discount on note payable

225,000

The ~ecember 31, 2011 statement of financial position wpuld show the discount on note payable as adeduction from note payable as follows: Note payable Discount on note payable (540,000 - ·225,000)

Catryins amount • December 3I , 201 1

240

s000 000

(

31 s:ooO)

1

4,685 .~

241

•