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RECEIVABLE

FINANCING
Receivable financing
financial flexibility of the company
capacity of the company to raise money out
of its receivable
usual reason general business decline
decrease in sales
increase in collection time
Company must not sacrifice its credit standing
When to derecognize the asset?
Derecognize;
Gain / loss
YES

Receivable Substantial
financing transfer of Risk and
rewards
NO Retain;
secured borrowing
Forms of receivable financing
1. Pledging of accounts receivable
2. Assignment of accounts receivable
3. Discounting of notes receivable
with recourse
Without recourse
4. Factoring of accounts receivable
1. Pledging of accounts receivable
use of receivable as a collateral for a loan
general assignment of accounts receivable
accounts receivable is not, in any manner,
affected
disclosure requirement:
carrying amount of the receivable pledged
significant terms and condition
Illustration 8:
On December 1, 2016, ABS Company borrowed 500,000
from PB Bank by issuing a one-year, which bank discounted
at 12%. Accounts receivable totaling 1,200,000 are pledged
to secure the loan.
2. Assignment of accounts receivable
more formal borrowing arrangement
Evidenced by financing arrangement and a promissory note
specific assignment of accounts receivable
assignor retains the ownership of the accounts receivable and
collection thereof
Either, notification or non-notification basis
Factors affecting the proceeds
Sales discounts
Sales returns and allowances
Uncollectible accounts
Cost of financing includes interest, service/financing charges,
commissions
Illustration 9:
On December 1, 2016, ABS Company entered into an
assignment arrangement with GME Finance Company to
advance 80% of all accounts assigned less 2,000 service
charge. During the year, 400,000 of accounts receivable
were assign; 250,000 collections were made on
outstanding accounts which were remitted to GME Finance
to apply first to 3,500 interest and the balance to
principal. Sales returns and allowance on assigned accounts
amounted to 5,000.
3. Discounting of notes receivable

endorsement of a promissory note to a bank


or financing company
banks advances amount of the note at maturity
value less discount (charges)
selling of notes to bank, with recourse liability /
obligation
3. Discounting of notes receivable (contd)

Terms in discounting:
1. Principal face value
2. Interest amount of interest for the entire term
3. Maturity value final value
4. Net proceeds discounted value received by the
endorser
5. Maturity date due date or maturity date of the note
6. Discount rate rate used by bank in discounting
7. Discount interest earned by bank
8. Discount period date of discounting and maturity
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1 January 30
Time

=
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1 January 30
Time

=
60
= 800,000 15% 360
= 20,000
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1 January 30
Time

= +
= 800,000 + 200,000
= 820,000
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1 December 21 January 30
Discount period
40 days
=
=
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1 December 21 January 30
Discount period
40 days
=
40
= 820,000 18% 360
= 16,400
Net proceeds
Maturity value 820,000
Less: Discount 16,400
Proceeds 803,600

Proceeds of discounting 803,600


Less: Carrying value of the note
Face value of the note 800,000
Accrued interest 6,667 806,667
Loss on discounting (3,067)
Illustration 10:
On December 21, 2016, ABS Company discounted
the 60-day, 15%, 800,000 note from GME
Company at PB-Bank. The note is dated
December 1 and the banks discount rate is
18%.
December 1 December 21 January 30
Accrued interest Discount period
20 days 40 days
=
20
= 800,000 15% 360
= 6,667
Journal Entry (with recourse)
Conditional Sale Secured Borrowing

Adjusting Journal Entry


if paid on maturity
Journal Entry (with recourse)
Conditional Sale Secured Borrowing
if dishonored
Journal Entry (with recourse)
Conditional Sale Secured Borrowing
Journal Entry (without recourse)
absolute sale of note
no contingent liability to be recognized
endorser is relieved from liability in case that maker
dishonors the note
note is to be derecognize
Journal entry on discounting:
4. Factoring of accounts receivable
absolute sale of accounts receivable
no contingent liability to be recognized
without recourse, on notification basis
receivable is to be derecognize
factor, assumes responsibility record-keeping, billing, and
collection of the accounts factored
selling-entity records gain / loss for the difference between
the proceeds and carrying amount of the receivable factored
factors holdback
receivable from factor
amount retained by the factor to cover probable sales discounts,
returns and allowances, and other special adjustment
classified as current asset
Illustration 11:
On December, ABS Company sold goods priced 200,000
with credit term n/30. These were immediately factored to
a finance company. The factoring fee was 10% of the
receivables purchased. The factors holdback is 5% of the
purchase price.
Accounts receivable, factored 200,000
Proceeds from factoring
Accouts receivable, factored 200,000
Less: Factoring fee (200,000 X 10%) (20,000) 180,000
Less: Carrying Value of accounts receivable (200,000)
Loss on Factoring 20,000
Receivable from factor (180,000 X 5%) 9,000
Total (29,000)
Net proceeds from factoring 171,000
Forms of receivable financing
1. Pledging of accounts receivable
2. Assignment of accounts receivable
3. Discounting of notes receivable
with recourse
Without recourse
4. Factoring of accounts receivable
Forms of receivable financing
1. Pledging of accounts receivable
2. Assignment of accounts receivable Secured
3. Discounting of notes receivable Borrowing
with recourse
Without recourse Sale of
4. Factoring of accounts receivable Receivable
end of presentation