1) Explain the discounting note receivable 2. Who are the original parties in a promissory note ? 3. Who are the parties involved after discounting of note receivable ? 4. Explain the endorsement of a negotiable instrument ? 5. What is the formula in computing net proceeds from discounting of notes receivable ? 6. Explain the maturity value 7. What is the formula in computing interest on the note receivable ? 8. Explain the discount in relation to discounting of note receivable 9. What is the formula in computing discount ? 10. Explain the carrying amount of the note receivable upon discounting. 11.What is the formula in computing gain or loss on discounting of note receivable? 12. Explain the discounting without resource. 13. Explain the discounting with resource accounted for as conditional sale. 14. Explain discounting with resource accounted for as secured borrowing 15.What are the criteria for the derecognition of a financial asset? Problem 9-3 Mythical Company provided the following transactions April 5 Received from A, a customer, P500,00, 60-day, 12% note, dated April 4, in payment of an account 19 The note of A was discounted with the bank at 14%. May 3 Received a P 1,000,000, 30-day noninterest bearing note dated May 1 from B, in payment of an account 16 The note of B was discounted with the bank at 12%. 25 Received from C, a customer, a P1,500,000 ,60-day 12% note dated May 15 and made by Company X. Gave the customer credit for the maturity value of note less discount at 12 % June 7 Received notice from the bank that the note of A was not paid on maturity. Paid bank the amount due plus protest fee and other charges of P20,000 15 Received a 60-day,12% note, P800,000, dated June 15, from D, a customer for sale of merchandise 18 Received full payment from A including interest of 12% on total amount due from maturity date of original note Required :

Please see the explanation field for answer and more detailed explanation.

Step-by-step explanation

REQUIREMENT #1

 

1. Receivable financing refers to an entity's financial flexibility or capacity to raise money from its receivables. The firm would therefore be in financial hardship since receivable collections are delayed yet cash payments for commitments must be maintained. Under these conditions, if the situation worsens, the firm may be forced to seek money by financing its receivables. Discounting, as a type of receivable finance, pertains to note receivables.

 

2. The original parties in a promissory note are the maker and payee. The maker is accountable and the one liable, and the payee is entitled to payment on the maturity date.

 

3. When a note is negotiable, the payee can obtain cash before the maturity date by discounting the note at a bank or other financial institution. The payee must endorse the note in order for it to be discounted.

 

As a result, the payee legally becomes an endorser, and the bank legally becomes an endorsee.

 

4. Endorsement is the simple act of signing at the back of a negotiable instrument to transfer rights to it. Endorsement might be with or without recourse.

 

5. The discounted value of the note received by the endorser from the endorsee is referred to as the Net Proceeds.

 

Net Proceeds = Maturity Value - Discount

 

6. Maturity Value is the amount due on the note on the maturity date.

 

Principal + Interest = Maturity Value

 

7. Interest is the amount of interest for the full term of the note.

 

Interest = Principal x Rate x Time

 

8. The amount of interest deducted in advance by the bank is referred to as the Discount.

 

9. Discount = Maturity Value x Discount Rate x Discount Period

 

10. To get the carrying amount of the note receivable,

 

Principal + Accrued Interest Receivable = Carrying Amount

 

11. Gain or loss is calculated on the difference between net proceeds from discounting and the carrying value of the note receivable.

 

Loss or Gain on Note Discounting =  Net Proceeds  - Carrying Amount of Note Receivable 

 

12. Without recourse endorsement or discounting implies that the endorser avoids future obligation even if the maker refuses to pay the endorsee on the maturity date.

 

13. Endorsement or discounting with recourse implies that the endorser is obligated to pay the endorsee if the maker fails to honor the note. When preparing the statement of financial position with disclosure of the contingent obligation, the note receivable discounted account is subtracted from the total notes receivable if the discounting is treated as a conditional sale of note receivable.

 

14. If the discounting is considered as secured borrowing, the note receivable is not derecognized, but rather an accounting obligation equal to the face amount of the note receivable discounted is recorded. If the note discounting is accounted for as secured borrowing, there is no gain or loss on discounting.

 

15. According to PFRS 9, paragraph 3.2.3, an entity must derecognize a financial asset if one of the following requirements is met:

 

a. The contractual rights to the financial asset's cash flows have expired.

b. The financial asset has been transferred, and the transfer is qualified for derecognition based on the extent of the transfer of ownership risks and benefits.

 

 

REQUIREMENT #2

PROBLEM 9-3

 

APRIL

 

April 5	Dr. Notes Receivable		500,000
		Cr. Accounts Receivable		500,000

 

April 19	Dr. Cash		501,075
	Dr. Loss on Note Discounting		1,425
		Cr. Notes Receivable Discounted		500,000
		Cr. Interest Income		2,500

 

SOLUTION:

 

Principal	500,000
Add: Interest (500k x 12% x 60/360	10,000
Maturity Value	510,000
Less: Discount (510k x 14% x 45/360	8,925
Net Proceeds	501, 075

 

Principal	500,000
Accrued Interest Receivable (500k x 12% x 15/360)	2,500
Carrying Amount of NR	502,500

 

Net Proceeds	501,075
Less: Carrying Amount of NR	502,500
Loss in Discounting	(1,425)

 

MAY

 

May 3	Dr. Notes Receivable		1,000,000
		Cr. Accounts Receivable		1,000,000

 

May 16	Dr. Cash		995,000
	Dr. Loss in Discounting		5,000
		Cr. Notes Receivable Discounted		1,000,000

 

Principal	1,000,000
Less: Discount (1M x 12% x 15/360)	5,000
Net Proceeds	995,000

 

May 25	Dr. Notes Receivable		1,500,000
	Dr. Interest Income		4,500
		Cr. Accounts Receivable		1,504,500

 

Principal	1,500,000
Add: Interest (1,500,000 x 12% x 60/360	30,000
Maturity Value	1,530,000
Less: Discount (1,530,000 x 12% x 50/360	25,500
Net Proceeds	1,504,500

 

JUNE

 

June 7	Dr. Accounts Receivable (510,000 +20,000)		530,000
		Cr. Cash		530,000
	Dr. Notes Receivable Discounted		500,000
		Cr. Notes Receivable		500,000

 

June 15	Dr. Notes Receivable Discounted		800,000
		Cr. Notes Receivable		800,000

 

June 18	Dr. Cash		535,650
		Cr. Accounts Receivable		530,000
		Cr. Interest Income (530k x 12% x 15/360)		2,650