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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
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