This document discusses receivable financing, which allows a company to raise funds using its accounts receivable. It describes pledge, assignment, and factoring of receivables. Pledging involves using receivables as collateral for a bank loan. The company retains collection rights but may need to remit funds to the bank. Accounting involves recording the loan and subsequent payments. Financial statements must disclose pledged receivables. Illustrations demonstrate journal entries for pledging receivables and repaying a loan.

1. CHAPTER 8:
RECEIVABLE FINANCING
Pledge, Assignment, and Factoring

2. To identify the sources of
financing through receivables
1
2
3
4
To know the accounting for
pledge of account receivables
To know the accounting for
assignment of account receivables
CONTENTS
5
To understand factoring of
account receievable
to know the classification and
presentation of pledged,
assigned, and factored accounts
receivable

3. Receivable financing - is the financial flexibility or
capability of an entity to raise moneyout of its
receivables.
During a general business decline, an entity may find
itself in tight cash positionbecause sales decrease and
customers are not paying their accounts on time.
But the entity’s current accounts and notes payable
must continue to be paid if itscredit standing is not to
suffer.
The entity then would be in a financial distress as
collections of receivable are delayed but cash
payments for obligations must be maintained.
Under these circumstances, if the situation becomes
very critical, the entity may beforced to look for cash
by financing its receivables.
Concept of receivable financing
Forms of receivable financing
The common forms of receivable financing are:
A.Pledge of accounts receivable
B.Assignment of accounts
receivable
C. Factoring of accounts receivable
D.Discounting of notes receivable

4. PLEDGE OF ACCOUNTS RECEIVABLE
• When loans are obtained from the bank or any lending institution, the accounts receivable may
be pledged as collateral security for the payment of the loan.
• Normally, the borrowing entity makes the collections of the pledged accounts but maybe required
to turn over the collections to the bank in satisfaction for the loan.
• No complex problems are involved in this form of financing except the accounting for the loan.
• The loan is recorded by debiting cash and discount on note payable if loan is discounted, and
crediting note payable.
• The subsequent payment of the loan is recorded by debiting note payable and crediting cash.
• With respect to the pledged accounts, no entry would be necessary. It is sufficient that disclosure
thereof is made in a note to financial statement.

5. ILLUSTRATION
AND
PROBLEMS

6. ILLUSTRATION:
• On November 1, 2021, the journal entry to record the loan is:
On November 1, 2021, an entity borrowed P1,000,000 from Philippine National
Bankand issued a promissory note for the same.
The term of the loan is one year and discounted at 12%. The entity pledged
accounts receivable of P2,000,000 to secure the loan.
Cash 880,000
Discount on note payable 120,000
Note payable–bank 1,000,000

7. Statement presentation
• On December 31, 2021, using the straight line method, the discount
on note payableis amortized as interest expense for two months from
November 1 to December 31.
Interest expense 20,000
Discount on note payable 20,000

8. Statement presentation
• At this point, if a statement of financial position is prepared on
December 31, 2021, the note payable-bank and the discount on note
payable are presented as follows:
Notes payable-bank 1,000,000
Discount on note payable ( 100,000)
carrying amount 900,000

9. Statement presentation
A note to financial statement should be made
“The note payable to bank matures on November 1, 2022 and is secured by accounts receivable
with face value of P2,000,000
Notes payable-bank 1,000,000
Cash 1,000,000
On November 1, 2022, The payment of the bank loan is
recorded.
And the discount on note payable is finally amortized.
Interest expense 100,000
Discount on note payable 100,000

10. PROBLEM 1
• PROBLEMSProblem 8-1 (ACP)pittance Company provided the following information in connection
with a bank loan.
• March 1 Pittance Company borrowed P2,000,000 from bankon a six-month note carrying a
interest of 12% perannum. Accounts of P 3,000,000 are pledged tosecure the loan.
• April 1 Pledged accounts of P 1,000,000 are collected minus 2% discount.
• June 1 The remaining pledged accounts are collected.
• Sept. 1 The bank loan is repaid plus interest.
REQUIRED:
Prepare the journal entries to record the transactions.

11. ANSWER:
March 1 Cash 2,000,000
N/P - Bank 2,000,000
April 1 Cash 980,000
Sales Discount 20,000
A/R 1,000,000
June 1 Cash 2,000,000
A/R 2,000,000
Sept 1 N/P - Bank 2,000,000
Interest Expense 120,000
Cash 2,120,000

12. PROBLEM 2
• Idealist company secured a 1 year bank loan of 4,000,000 on october 1, 2021. The
loan was discounted at 10%.
• The entity signed a note for the loan and pledged 5,000,000 of its accounts
receivable as collateral for the same. The accounting period of the entity endson
december 31 , 2021
REQUIRED:
1. Prepare journal entries including adjustment from the date of loan up todate of
maturity.
2. Statement presentation of the bank loan with adequate disclosure ondecember
31, 2021

13. ANSWER:
Requirement #1
Cash 3,600,000
Discounts on Notes Payable 400,000
Notes Payable - Bank Loan 4,000,000
Interest Expense 100,000
Discount on Notes Payable 100,000
Requirement #2
Note Payable- Bank 4,000,000
Less: Discount Note Payable (300,000)
Carrying Amount 3,700,000