Chapter 14 Receivable Financing - Pledge, Assignment, and Factoring Flashcards
Receivable Financing is the ____ or capability of an entity to ____ out of its receivables.
financial flexibility, raise money
The common forms of receivable financing are:
Pledge of A/R, Assignment of A/R, Factoring of A/R, Discounting of N/R
When loans are obtained from the bank or any lending institution, the A/R may be pledged as ___ for the payment of the loan.
collateral security
Normally, the borrowing entity makes the ____ but may be required to turn over the ____ to the ___ in satisfaction for the loan.
collections, collections, bank
With respect to the pledged accounts, is an entry necessary? If yes, give the entries.
No. It is sufficient that disclosure thereof is made in a note to financial statement.
(Pledging) The entries to record the loan is:
Dr. Cash at Net Proceeds (can also be thought of as balancing amount), Dr. Discount on Note Payable at Face Value of Loan - (Face Value of LoanDiscount Rate), Cr. N/P-bank at Face Value of note. Note that (Face Value of LoanDiscount Rate) = Interest deducted in advance. Note that Net Proceeds = Face Value of loan - Interest deducted in advance.
(Pledging) Accounts were pledged at December 1, 2015 and the term of the related loan is one year. On December 31, 2015 (reporting period), the entries to record the accrued interest expense are:
Dr. Interest Expense at (FaceRateTime), Cr. Discount on note payable at the same amount.
Carrying amount of the N/P =
N/P - Carrying amount of Discount on N/P
(Pledging) Accounts were pledged at December 1, 2015 and the term of the related loan is one year. On December 1, 2015, the entries to record the payment of the bank loan are:
Dr. N/P-bank at face value, Cr. Cash at the same amount. And the discount on N/P is finally amortized as follows: Dr. Interest Expense at the carrying amount of the Discount on N/P, Cr. Discount on N/P at its carrying amount
Assignment of A/R means that a ___ called the ___ transfers its rights in some of it?s A/R to a ___ called the ___ in consideration for a loan.
borrower, assignor, lender, assignee
Assignment is a more ____ type of pledging of A/R
formal
Assignment is secured borrowing evidenced by a ____ and a ___ both of which the assignor signs.
financing agreement, promisorry note
Pledging is ___ because ___ A/R serve as collateral security for the loan.
general, all
Assignment is ___ because ____ A/R serve as collateral security for the loan.
specific, specific.
Assignment may be done either on a ____ or ____ basis
nonnotification, notification
When accounts are assigned on a nonnotification basis, as is usually the case, customers are ______, that their accounts have been _____. As a result, the customers continue to make payments to the ____, who in turn remits the collections to the ____
not informed, assigned, assignor, assignee
When accounts are assigned on a notification basis, customers are ___ to make their ___ directly to the ____
notified, payments, assignee
The assignee usually lends only a certain percentage of the face value of the accounts assigned because the assigned accounts may not be _____ by reason of such factors as ___, ____, and ____.
fully realized, sales discount, sales return and allowances, uncollectible accounts
The assignee usually charges ____ for the loan that it makes and requires a ___ or ____ for the assignment agreement.
interest, service/financing charge, commission
(Assignment) The entry to separate the assigned accounts and to record the loan are:
Dr. A/R-assigned at amount of assigned A/R, Cr. A/R at the same amount; Dr. Cash at balancing amount, Cr. Service Charge at specified amount, Cr. N/P-bank at the amount advanced by the bank. Note: The entries to separate the assigned accounts and to record the loan are the same under the nonnotification and notification basis.
(Assignment-Nonnotification) The entry to record the issuance of a credit memo for sales return to a customer whose account was assigned is:
Dr. Sales Return at the specified amount, Cr. A/R-assigned at the same amount
(Assignment-Notification) The entry to record the receipt of notice from the bank of a collection from assigned accounts with a sales discount and the payment of interest for the interest due:
Dr. N/P-bank at total cash collected by the bank, Dr. Sales Discount at the discount availed, Cr. A/R-assigned at the balancing amount.
(Assignment-Nonnotification) The entry to record the collection of assigned account less a discount is:
Dr. Cash at total cash collected Dr. Sales Discount at discount availed, Cr. A/R-assigned at the balancing amount.
(Assignment-Nonnotification) The entry to record the remittance of total collections to the bank plus interest:
Dr. N/P-bank at the total cash remitted to the bank (which is equal to the total collection made by the assignor), Dr. Interest Expense at the (Carrying Amount of the N/P*Interest Rate specified by the bank during the assignment), Cr. Cash at balancing amount.
(Assignment-Nonnotification) The entry to record the writeoff of assigned accounts is:
Dr. ADA at the amount, Cr. A/R-assigned at the same amount.
(Assignment-Nonnotification) The entry to record the transfer the remaining balance of A/R-assigned to A/R after the total payment of the loan:
Dr. A/R at the same amount, Cr. A/R-assigned at the remaining balance after the total payment of the loan
(Assignment-Notification) The entry to record the collection of assigned accounts, and the final settlement (inclusive of interest payment and the settlement of the uncollected assigned accounts)
Collection and Interest Payment: Dr. Cash at Remittance from bank, Dr. Interest expense at Interest, Dr. N/P-bank at Balance due to the bank, Cr. A/R-assigned at Collection of bank on the month of settlement. Settlement of Uncollected Assigned Accounts: Dr. A/R at the same amount, Cr. A/R-assigned at the remaining balance after the total payment of the loan. Note: Face value of loan - Total Cash collected by the bank [not including the collection in the month of settlement] = Balance due to the bank. Collection of bank on the month of settlement - Balance due to the bank = Excess Collection. Excess Collection - Interest = Remittance from bank. Interest = Balance due to the bank*Interest specified
Balance of A/R-assigned uncollected =
Total A/R-assigned - (Collections by the bank + Sales Discount + Sales Return + Worthless Accounts)
Factoring is a sale of A/R on a ____, ____ basis
without recourse, notification
In a fatoring arrangement, an entity sells A/R to a bank or finance entity called a ___
factor
Accordingly, a gain or loss is recognized for the difference between the ____ and the _____
proceeds received, net carrying amount
Factoring differs from an assignment in that an entity actually ___ of the A/R to the factor.
transfers ownership
Thus, the factor assumes ___ for the uncollectible factors account
responsibility
In assignment, the assignor ____ ownership of the accounts
retains
Because of the anture of the transcation, the customers whose accounts are factored are notified and required to pay to ___
the factor (directly to it)
The entries to record casual factoring are:
Dr. Cash at the cash received, Dr. ADA (if any) at the amount related to the A/R factored , Dr. Loss on factoring (if any) at the balancing amount, Cr. A/R at the amount factored
(Factoring as a continuing agreement) Before a merchandise is shipped to a customer, the selling entity requests the factor’s ____
credit approval
(Factoring as a continuing agreement) The factor then assumes the ___ function as well as the ___function
credit, collection
(Factoring as a continuing agreement) For compensation, typically the factor charges a ____ or ____ for its services of credit approval, billing, collecting, and assuming uncollectible
commission, factoring fee
T/F: (Factoring as a continuing agreement) The factor can’t withhold a predetermined amount as a protection against customer returns and allowances and other special adjustments.
False. The factor can. This is known as “factor’s holdback”
The factor’s holdback is a ___ from factor and classified as ____
receivable, current asset
Final settlement of the factor’s holdback is made after the ______ have been _______
factored receivables, fully collected
The entries to record factoring as a continuing agreement are:
Dr. Cash at balancing amount, Dr. Sales discount (if any) at the discount computed, Dr. Commission at the computed commission, Dr. Receivable from factor at the withheld amount, Cr. A/R at the face amount of receivables factors
(Factoring as a continuing agreement) The entries to record allowance of credit for damaged merchandise are:
Dr. Sales Return and Allowance at the credit given, Cr. Sales Discount at the credit given*discount rate, Cr. Receivable from factor at balancing amount
(Factoring as a continuing agreement) The entries to record the final settlement with the factor is recorded as follows:
Dr. Cash at the same amount, Cr. Receivable from factor at the balance remaining
(Credit card) The entries to record the sales (recording entity is the seller):
Dr. A/R-credit card company at the sale price, Cr. Sales at the same amount
(Credit card) The entries to record the payment from the credit card company:
Dr. Cash at the balancing amount, Dr. Credit card service charge at total sale price *service charge percent, Cr. A/R-Credit card service charge at the sale price
T/F: Some credit card companies allows the retailer business to deposite the credit card receipts directly to a current account.
True. This is a form of factoring of A/R because the credit card sales are treated as cash sales by the retailers.
(Credit card) The entries to record the sales (recording entity is the seller):
Dr. Cash at the balancing amount, Dr. Credit card service charge at total sale price *service charge percent, Cr. A/R-Credit card service charge at the sale price
Net Realizable Value of A/R=
(A/R-unassigned + A/R-assigned) - ADA
Equity in assigned accounts =
A/R-assigned - N/P-bank(related to assignment)
