Receivable Financing

DISCOUNTING
DISCOUNTING
ON
ON NOTES
NOTES
RECEIVABLE
RECEIVABLE
By: MERIE ROSE R. BUTAD
The objectives
for today's discussion

TO KNOW TO DISTIGUISH TO UNDERSTAND

the concept of discounting discounting of note discounting of note
note receivables. receivable with recourse and receivable accounted for as
without recourse conditional sale and as

secured borrowing

The concept of
discounting on
notes receivable

In the original note, the original parties are the maker and
payee.

When the note is negotiable, the payee may obtain cash

before maturity date by discounting the note at a bank or
other financing company. Therefore, the payee shall
endorse the notes.
The payee becomes an endorser and the bank becomes an endorsee.
 Discounting of Notes Receivable
Discounting means selling or pledging a customer's notes receivable to the bank at some point prior to
the note's maturity date.
 May be with recourse
which means the
endorser shall pay
the endorsee if the
maker dishonor the

Endorsement note.

Transfer of right to a negotiable instrument by simply

signing at the back of the instrument May be without
recourse which
means the endorser
avoids future liability
even if the maker
refuses to pay
Terms related to
discounting of note.
The following are the definition of terms you may encounter in this chapter:
Maturity Date - Date on which the note should be paid
Maturity Value - Amount due on the note at the date of maturity
(Principal plus interest)
Principal - Also referred as the face value
Interest - Amount of interest for the full term (principal x rate x time)
Interest Rate - Rate appearing on the face of the note
Time - Period which interest shall accrue or the entire period of the note
Net Proceeds - Discounted Value of note received
(Maturity Value less discount)
Discount - Amount of interest deducted by the bank in advance
(Maturity Value x Discount rate x Discount Period)
Discount Rate - Rate used by the bank in computing the discount
Discount Period - Period of time from date of discounting to maturity date
 Principal (Face Value)
Plus Total Interest (FV x NRate x Total Period)
Maturity Value
How to solve Less Discount (MV x DRate x Discount Period)
for discounting Net Proceeds
of notes Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
receivable? Gain or loss on Notes Receivable Discounting
APPLICATION
on problem solving

A Php 2,400,000, 6-month, 12% noted dated July 1

is received from a customer by an entity and

discounted by the Bank Ko on August 1 at 15%.

WITHOUT RECOURSE
A Php 2,400,000, 6-month, 12% noted dated July 1 is received from a customer by an
entity and discounted by the Bank Ko on August 1 at 15%.

Principal - 2,400,000 Principal (Face Value)

Date of the Note - July 1 Plus Total Interest (FV x NRate x Total Period)
Discounted Date - August 1
Maturity Value
Maturity Date - January 1
Interest Rate - 12% Less Discount (MV x DRate x Discount Period)
Discount Rate - 15% Net Proceeds
Total Period - 6/12 (July 1 - Jan 1) Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
Accrued Period - 1/12 (July 1 - Aug 1) Gain or loss on Notes Receivable Discounting
Discount Period - 5/12 (Aug 1 - Jan 1)

WITHOUT RECOURSE
A Php 2,400,000, 6-month, 12% noted dated July 1 is received from a customer by an
entity and discounted by the Bank Ko on August 1 at 15%.

Principal - 2,400,000 Principal (Face Value)

Date of the Note - July 1 Plus Total Interest (FV x NRate x Total Period)
Discounted Date - August 1
Maturity Value
Maturity Date - January 1
Interest Rate - 12% Less Discount (MV x DRate x Discount Period)
Discount Rate - 15% Net Proceeds
Total Period - 6/12 (July 1 - Jan 1) Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
Accrued Period - 1/12 (July 1 - Aug 1) Gain or loss on Notes Receivable Discounting
Discount Period - 5/12 (Aug 1 - Jan 1)

2,400,000
(2,400,000 x 12% x 6/12) Plus 144,000
Cash 2,385,000

2,544,000
Loss on NR Discounting 39,000
(2,544,000 x 15% x 5/12) Less 159,000
Note Receivable 2,400,000

2,385,000
Interest Income 24,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
(39,000)
WITH RECOURSE
(CONDITIONAL SALE)
A Php 2,400,000, 6-month, 12% noted dated July 1 is received from a customer by an
entity and discounted by the Bank Ko on August 1 at 15%.
Principal (Face Value)
Principal - 2,400,000 Plus Total Interest (FV x NRate x Total Period)
Date of the Note - July 1
Discounted Date - August 1
Maturity Value
Maturity Date - January 1 Less Discount (MV x DRate x Discount Period)
Interest Rate - 12% Net Proceeds
Discount Rate - 15% Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
Total Period - 6/12 (July 1 - Jan 1) Gain or loss on Notes Receivable Discounting
Accrued Period - 1/12 (July 1 - Aug 1)
Discount Period - 5/12 (Aug 1 - Jan 1)

WITH RECOURSE
(CONDITIONAL SALE)
A Php 2,400,000, 6-month, 12% noted dated July 1 is received from a customer by an
entity and discounted by the Bank Ko on August 1 at 15%.
Principal (Face Value)
Principal - 2,400,000 Plus Total Interest (FV x NRate x Total Period)
Date of the Note - July 1
Discounted Date - August 1
Maturity Value
Maturity Date - January 1 Less Discount (MV x DRate x Discount Period)
Interest Rate - 12% Net Proceeds
Discount Rate - 15% Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
Total Period - 6/12 (July 1 - Jan 1) Gain or loss on Notes Receivable Discounting
Accrued Period - 1/12 (July 1 - Aug 1)
Discount Period - 5/12 (Aug 1 - Jan 1)

2,400,000
(2,400,000 x 12% x 6/12) Plus 144,000
Cash 2,385,000

2,544,000
Loss on NR Discounting 39,000
(2,544,000 x 15% x 5/12) Less 159,000
Notes Receivable Discounted 2,400,000

2,385,000
Interest Income 24,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
(39,000)
WITH RECOURSE
(CONDITIONAL SALE)
ON MATURITY DAY .... NOTE IS PAID BY THE MAKER

2,400,000
August 1
(2,400,000 x 12% x 6/12) Plus 144,000

2,544,000
Cash 2,385,000
(2,544,000 x 15% x 5/12) Less 159,000
Loss on NR Discounting 39,000

2,385,000
Notes Receivable Discounted 2,400,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
Interest Income 24,000
(39,000)

January 1

Notes Receivable Discounted 2,400,000

Notes Receivable 2,400,000
WITH RECOURSE
(CONDITIONAL SALE)
ON MATURITY DAY .... NOTE IS DISHONORED BY MAKER
2,400,000
August 1
(2,400,000 x 12% x 6/12) Plus 144,000

2,544,000
Cash 2,385,000
(2,544,000 x 15% x 5/12) Less 159,000
Loss on NR Discounting 39,000

2,385,000
Notes Receivable Discounted 2,400,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
Interest Income 24,000
(39,000)
January 1

Accounts Receivable 2,550,000

Cash 2,550,000
to record payment to Bank Ko with BC of 6,000

Note Receivable Discounted 2,400,000

Note Receivable 2,400,000
to cancel the continguent liability
WITH RECOURSE
(SECURED BORROWING)
A Php 2,400,000, 6-month, 12% noted dated July 1 is received from a customer by an
entity and discounted by the Bank Ko on August 1 at 15%.
Principal (Face Value)
Principal - 2,400,000 Plus Total Interest (FV x NRate x Total Period)
Date of the Note - July 1
Discounted Date - August 1
Maturity Value
Maturity Date - January 1 Less Discount (MV x DRate x Discount Period)
Interest Rate - 12% Net Proceeds
Discount Rate - 15% Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
Total Period - 6/12 (July 1 - Jan 1) Gain or loss on Notes Receivable Discounting
Accrued Period - 1/12 (July 1 - Aug 1)
Discount Period - 5/12 (Aug 1 - Jan 1)

2,400,000
(2,400,000 x 12% x 6/12) Plus 144,000
Cash 2,385,000

2,544,000
Interest Expense 39,000
(2,544,000 x 15% x 5/12) Less 159,000
Liability for NR discounted 2,400,000

2,385,000
Interest Income 24,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
(39,000)
WITH RECOURSE
(SECURED BORROWING)
ON MATURITY DAY .... NOTE IS PAID BY THE MAKER

2,400,000
August 1
(2,400,000 x 12% x 6/12) Plus 144,000

2,544,000
Cash 2,385,000
(2,544,000 x 15% x 5/12) Less 159,000
Loss on NR Discounting 39,000

2,385,000
Notes Receivable Discounted 2,400,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
Interest Income 24,000
(39,000)

January 1

Liability for Note Receivable Discounted 2,400,000

Notes Receivable 2,400,000
WITH RECOURSE
(SECURED BORROWING)
ON MATURITY DAY .... NOTE IS DISHONORED BY MAKER
2,400,000
August 1
(2,400,000 x 12% x 6/12) Plus 144,000

2,544,000
Cash 2,385,000
(2,544,000 x 15% x 5/12) Less 159,000
Loss on NR Discounting 39,000

2,385,000
Notes Receivable Discounted 2,400,000
( 2,400,000 + (2,400,000x 12% x1/12) Less 2.424,000
Interest Income 24,000
(39,000)
January 1

Accounts Receivable 2,550,000

Cash 2,550,000
to record payment to Bank Ko with BC of 6,000

Liability for NR Discounted 2,400,000

Note Receivable 2,400,000
to derecognize the liability for
NR Discounted and notes receivable
LET'S TEST
YOUR LEARNING.
GET READY :)
problem solving

Madlie Company provided the following

transaction:

On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php

500,000 for six months with interest to be

paid at maturity at 12%

problem solving
January 1
Madlie Company provided the following

transaction:
Notes Receivable 500,000
Sales 500,000
On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php

500,000 for six months with interest to be

paid at maturity at 12%

problem solving

Madlie Company provided the following

transaction:

On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php

500,000 for six months with interest to be

paid at maturity at 12%

On March 1 The entity discounted the note

without recourse at the local bank at 15%

On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php

500,000 for six months with interest to be

paid at maturity at 12%

On March 1 The entity discounted the note

without recourse at the local bank at 15%

Principal (Face Value)

Plus Total Interest (FV x NRate x Total Period)
Maturity Value
Less Discount (MV x DRate x Discount Period)
Net Proceeds
Less Carrying Amount ( FV + (FV x NRate x Accrued Period)
Gain or loss on Notes Receivable Discounting

problem solving
January 1
Madlie Company provided the following

transaction:
Notes Receivable 500,000
Sales 500,000
On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php March 1

500,000 for six months with interest to be

paid at maturity at 12% Cash 503,500

Loss on NR Discounting 6,500
Note Receivable 500,000
On March 1 The entity discounted the note
Interest Income 10,000
without recourse at the local bank at 15%

problem solving

Madlie Company provided the following

transaction:

On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php

500,000 for six months with interest to be

paid at maturity at 12%

On March 1 The entity discounted the note

without recourse at the local bank at 15%

On July 1 The customer paid the bank in full

problem solving
January 1
Madlie Company provided the following

transaction:
Notes Receivable 500,000
Sales 500,000
On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php March 1

500,000 for six months with interest to be

paid at maturity at 12% Cash 503,500

Loss on NR Discounting 6,500
Note Receivable 500,000
On March 1 The entity discounted the note
Interest Income 10,000
without recourse at the local bank at 15%

July 1
On July 1 The customer paid the bank in full

No entry
problem solving
January 1
Madlie Company provided the following

transaction:
Notes Receivable 500,000
Sales 500,000
On January 1 The entity sold merchandise

for Php 500,000 accepting a note of Php March 1

500,000 for six months with interest to be

paid at maturity at 12% Cash 503,500

Loss on NR Discounting 6,500
Note Receivable Discounted 500,000
On March 1 The entity discounted the note
Interest Income 10,000
without recourse at the local bank at 15%

July 1
On July 1 The customer paid the bank in full

Note Receivable Discounted 500,000
Notes Receivable 500,000
 January 1

problem solving Notes Receivable 500,000

Sales 500,000

Madlie Company provided the following

March 1
transaction:

Cash 503,500
On January 1 The entity sold merchandise Loss on NR Discounting 6,500
for Php 500,000 accepting a note of Php Note Receivable Discounted 500,000
500,000 for six months with interest to be Interest Income 10,000
paid at maturity at 12%
July 1

On March 1 The entity discounted the note

Accounts Receivable 535,000
without recourse at the local bank at 15%
Cash 535,000
to record payment to Bank
On July 1 The customer didn't paid the bank

in full. Bank Charges amounted to 5,000. Note Receivable Discounted 500,000

Note Receivable 500,000
to cancel the continguent liability