Notes Receivable Discounting

–Notes Receivable
Discounting
–NOTES RECEIVABLE
– Claims supported by a formal
promise to pay usually in the
form of notes.
– Represents only claims arising
from sale of merchandise or
service in the ordinary course of
business.
– NEGOTIABLE PROMISSORY NOTE

– Written contract in which one
person, known as the maker,
promises to pay another person,
known as the payee, a definite
sum of money.
– NOTES RECEIVABLE DISCOUNTING

– It is a transfer or endorsement of
promissory note by the payee in
favor of another party, usually a
bank.
– BEFORE MATURITY
– NR DISCOUNTING
–NOTES RECEIVABLE
DISCOUNTING
WITHOUT RECOURSE
If the notes were discounted and
were dishonored at maturity, the
transferor recognizes no amount of
liability and pays nothing to financial
institution.
The sale is absolute and no contingent
liability.
– JOURNAL ENTRY
WITHOUT RECOURSE
Cash xxx
Loss on note receivable discounting
xxx
Note receivable xxx
Interest income xxx
–NOTES RECEIVABLE
DISCOUNTING
WITH RECOURSE
The transferor recognizes an
accounting liability and pays the
financial institution the maturity
value plus any amount charged
as protest fee.
When silent, it is assumed to
be with recourse.
– JOURNAL ENTRY
WITH RECOURSE (Conditional Sale)
Cash xxx
xxx
Note receivable discounted
xxx
Interest income xxx
– JOURNAL ENTRY
SUBSEQUENT ENTRY (CONDITIONAL SALE)
Payment was made by the maker at

maturity date No payment was
made by the maker
Note receivable discounted xxx
Accts. Receivable xxx
Note receivable xxx
Cash xxx
Note receivable
discounted xxx
Note receivable xxx
– JOURNAL ENTRY
WITH RECOURSE (SECURED BORROWING)
Cash xxx
Interest Expense xxx
Liab. for note receivable discounted xxx
Interest income xxx
– TERMS TO REMEMBER
• Net proceeds – refer to the
discounted value of the
note received by the
endorser from the
endorsee.
Net proceeds =
maturity value – discount
• Maturity value – amount

due on the note at the
date of maturity.
Maturity value =
principal + interest
• Maturity date – the date on which the

note should be paid.
• Principal – amount appearing on the
face of the note. Also referred
to as face value.
• Interest – amount of interest for the
full term of the note
Interest = principal x rate x time
• Interest rate– rate appearing on the face of

the note.
• Time – period within which interest shall
accrue. For discounting purposes, it is
the period from the date of note to
maturity date. In other words, the
term “time” is the entire period or full term
of the note.
• Discount – amount of interest deducted by

the bank in advance.
Discount = maturity value x discount rate x
discount period
• Discount rate – rate used by the bank in
computing the discount. If no discount rate is
given, the interest rate is safely assumed as
the discount rate.
• Discount period – period of time from the
date of discounting to maturity date. It is the
unexpired term of the note.
Discount period = term of the note – the
expired portion up to the date of
discounting.
– Illustration:
Moxie Company received from a
customer a one-year P500,000 note,
bearing annual interest of 8%. After
holding the note for six months, Moxie
discounted the note without recourse at
EZ bank at an effective interest rate of
10%. What amount of cash did Moxie
Co. receive from the bank?
WITHOUT RECOURSE
Cash 513,000
7,000 Note receivable
500,000
Interest income
20,000
WITH RECOURSE (dishonored by maker)

– Cash 513,000
7,000 Note receivable
discounted 500,000
Interest income
20,000
– Accounts Receivable 500,000
Cash
500,000
– Notes Receivable Discounted
500,000
Notes Receivable 500,000
– QUIZ
1. If the notes were discounted and
were dishonored at maturity, the
transferor recognizes no amount of
liability and pays nothing to financial
institution.
• It is a transfer or endorsement of
promissory note by the payee in favor
of another party, usually a bank.
• The unexpired term of the note.
• The discounted value of the note
received from the endorsee.
5. An amount of interest deducted by
the bank in advance.
• Morni
ngsta
r
Comp
any
accep
ted
from
a
custo
mer
P1,00
0,000
face
amou
nt, 6-
mont
h, 8%
note
dated
April
15,
2016.
On
the
same
date,
the
entity
disco
unted
the
note
witho
ut
recou
rse at
10%
disco
unt
rate.
What
is the
loss
on
note
receiv
able
disco
untin
g?
2. A note with a principal
amount of P500,000 was
discounted on November 30,
2015 at a bank for a discount
rate of 15% and proceeds
worth P521,406.25. Maturing
on August 31, 2016, this note
was issued on March 1, 2015.
How much is the interest rate
of the note?
3. What is the discount charged by
the bank on a P27,000 , 12%, 90-
day note receivable dated March 5,
that was discounted at 15% on April
24?
4. Tony Stark discounted his 120-day, 8
%, P750,000 note to the bank for 15%
discount after holding it for 40 days. How
much cash did Tony received from
discounting the note? (5.) How much is
the loss from discounting the note?
–SOLUTIONS
– Morningstar Company accepted from a
customer P1,000,000 face amount, 6-
month, 8% note dated April 15, 2016. On
the same date, the entity discounted the
note without recourse at 10% discount rate.
What is the loss on note receivable
discounting?
MV = 1M + (1M* 8% * 6/12) = 1,040,000
Bank Discount = 1,040,000 * 10% * 6/12 = 52,000
Net proceeds = 1,040,000 – 52,000 = 988,000
Net proceeds = 988,000

Less: CA = 1,000,000 (bec discounted on the same day)
Loss: (12,000)
– A note with a principal amount of P500,000 was
discounted on November 30, 2015 at a bank for a
discount rate of 15% and proceeds worth P521,406.25.
Maturing on August 31, 2016, this note was issued on
March 1, 2015. How much is the interest rate of the
note?
–Proceeds = MV – Discount
– = MV – (MV x DR x DP)
–521,406.25 = MV x (1 – DR xDP)
–521,406.25 = MV x (1 – 0.15x9/12)
–521,406.25 = MV x 0.8875
– MV = 587,500
– What is the discount charged by the
bank on a P27,000 , 12%, 90-day note
receivable dated March 5, that was
discounted at 15% on April 24?
MV = 27,000 + (27,000 x 12% x 90/360)
= 27,000 + 810
= 27,810
Discount Period = Term of Note – Expired Portion of Note

= 90 – 50
= 40 days
Discount = MV x DR x DP
=27,810 x 15% x 40/360
= 463.5
– 4. Tony Stark discounted his 120-day, 8 %,
P750,000 note to the bank for 15% discount
after holding it for 40 days. How much cash did
Tony received from discounting the note? (5.)
How much is the loss from discounting the
note?
MV = Principal + Interest
= 750,000 + (750,000 x 8% x 120/360)
= 750,000 + 20,000
= 770,000
Discount = MV x Disc Rate x Disc Period
= 770,000 x 15% x 80/360
= 25,666.67
Proceeds = MV – Discount
= 770,000 – 25,666.67
= 744,333.33

Notes Receivable Discounting

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Notes Receivable Discounting

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–Notes Receivable

– NEGOTIABLE PROMISSORY NOTE

– NOTES RECEIVABLE DISCOUNTING

Payment was made by the maker at

• Maturity value – amount

• Maturity date – the date on which the

• Interest rate– rate appearing on the face of

• Discount – amount of interest deducted by

WITH RECOURSE (dishonored by maker)

Net proceeds = 988,000

Discount Period = Term of Note – Expired Portion of Note

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