Prepared by: Sherwin B.
Santos, CPA
E-mail Address: _sherwin.santos@clsu2.edu.ph________
Central Luzon State University
Science City of Muñoz 3120
Nueva Ecija, Philippines
Instructional Module for the Course
ACCTG 2105 / Intermediate Accounting 1
Module
TOPIC 10 (Discounting of Note Receivable)
I. Objectives
At the end of the module, the following are expected:
A. Understand the concept of discounting note receivable.
B. Distinguish discounting of note receivable with recourse and without recourse.
C. Understand discounting of note receivable accounted for as conditional sale
with recognition of contingent liability.
D. Understand discounting of note receivable accounted for as secured borrowing.
II. Learning Activities
RECEIVABLE FINANCING: DISCOUNTING OF NOTE RECEIVABLE
A discount on note receivable happens when the present value of the payment
received from the note are less than its face amount.
Notes are usually sold with or without recourse, meaning the company
discounting the note agrees to shoulder the cost if the maker dishonors the note. When
notes receivables are sold with recourse, the company shall recognize a contingent
liability that must be disclosed in the notes to financial statements.
Contingent Liability – obligation to pay an amount in the future if an uncertain event
occurs.
Terms:
a. Net proceeds – the value of the discounted note received from the endorsee
(usually a bank or financial institution).
b. Maturity Value – the value due on the note on time of maturity.
c. Maturity date – date of which the note must be paid.
d. Principal – amount that appears on the face of the note.
e. Interest – amount of interest on full term of the note.
f. Interest rate – Interest rate shown on the face of the note
Example 1
A 500,000, 180-day 10% note dated March 30 was received from a customer
and discounted without recourse on May 30 at 12% discount rate.
To make computing easier follow the steps to computing each:
Step 1: Compute the Maturity Value
Principal 500,000
Interest (500000 x 10% x 180/360) 25,000
Maturity Value 525,000
Note that the interest is computed as for the entire 180 day of the note to
determine the maturity value.
Step 2: Compute the Discount.
Discount (525000 x 12% x 120/360) 21000
Note that the discount period is the time remaining since March 30 – May 30 = 60
days and 180 days is the entire amount then: 180 – 60 = 120.
Step 3: Compute for net proceeds
Maturity Value 525,000
Discount 21,000
Net Proceeds 504,000
Step 4: Compute for Carrying Amount of the note
Principal 500,000.00 Accrued interest receivable (500000 x 10% x
60/360) 8,333.33
Carrying Amount of Notes receivable 508,333.33
Gain or Loss on Discounting
If Carrying amount > Net proceeds = Loss on note discounting
If Carrying amount < Net proceeds = Gain on note discounting
In this case: Net proceeds 504,000.00
Carrying Amount of Notes receivable 508,333.33
Loss on Note discounting (4,333.33)
Journal Entry
Since in the example is without recourse there shall be no contingent liability.
Cash 504,000.00
Loss on note receivable discounting 4,333.33
Note Receivable 500,000.00
Interest Income 8,333.33
Now assume that in the previous example the note was discounted with recourse,
the transaction can either be accounted for either of the following: a. Conditional
Sale
b. Secured Borrowing
Conditional Sale
If in the previous example the note is treated as a Conditional Sale the journal
entry to record transaction is
Cash 504,000.00
Loss on note receivable discounting 4,333.33
Note Receivable discounted 500,000.00
Interest income 8,333.33
The note account title note receivable discounted is deducted from notes
receivable in the statement of financial position.
If note is paid by maker in the date of maturity
Note receivable discounted 500,000
Note Receivable 500,000
If note is dishonored by the maker and the bank charged the company 5,000
Accounts Receivable 530,000
Cash 530,000
Notes receivable discounted 500,000
Note Receivable 500,000
Note: The first entry is to record payment to the bank of the amount of the Maturity
value plus any bank charges. The second entry is to cancel the contingent liability since
the company is already paid and is no longer liable.
Secured borrowing
Assume again the example above except that the note is treated as secured
borrowing the entry shall be:
Cash 504,000.00
Interest Expense 4,333.33
Liability for note receivable discounted 500,000.00
Interest income 8,333.33
In secured borrowing, a liability is recorded equal to the amount of the face value
of the note in place of note receivable. No gain or loss shall be recognized on if note
receivable is discounted for as a Secured borrowing.
ACCTG 2105 / Intermediate Accounting 1
Note Paid by the maker in the date of maturity
Liability for note receivable discounted 500,000
Note Receivable 500,000
The liability and Note Receivable is derecognized if the maker paid the bank.
Note dishonored by maker:
Accounts Receivable 530,000
Cash 530,000
Derecognition of liability and Note discounted
Liability for note receivable discounted 500,000
Note receivable 500,000
References
Intermediate Accounting Volume 1, 2021 ed. by Valix, Peralta & Valix
