Chapter 15 Receivable Financing - Discounting of Notes Receivable Flashcards
In a promissory note, the original parties are the ___ and ___. The __ is the one liable and the ___ is the one entitled to payment on the date of maturity.
maker, payee, maker, payee
When a note is ___, the payee may obtain cash before maturity date by ___ the note at a bank or other financing company.
negiotiable, discounting
To discount the note, the payee must ___ it. Thus, legally, the payee becomes an ___ and the bank becomes an ___.
endorse, endorser, endorsee
Endorsement may be with recourse which meant that _______ if the maker dishonors the note. This is the _____ of the endorser.
the endorser shall pay the endorsee, contingnet/secondary liability
Endorsement may be without recourse, which means that the endorser avoids future liability even if _____ on the date of maturity.
the maker refuses to pay the endorsee
In the absence of any evidence to the contrary, endorsement is assumed to be _____
with recourse
Net Proceeds =
Maturity Value - Discount
Discount =
Maturity Value * Discount Rate * Discount Period
Discount Rate is the rate used by the ___ in ____ the discount. If no discount rate is given, the interest rate is ____
bank, computing, assumed as the discount rate.
Discount Period is the period of time from ___ to ___
date of discounting, discount rate
Maturity Value =
Principal * Rate * Time
Principal is also known as as
Face Value
Interest =
Face * Interest Rate * Time
Interest Rate is the rate appearing on ___
the face of the note. Aka Stated Rate
Time =
Full term of the note. The period from date of note to maturity date
Maturity Date is the date on which ____
the note should be paid
Accrued Interest Receivable is the earned interest from ___ to ____
date of note, date of discounting
Gain or Loss on Note Discounting =
Net Proceeds - Carrying Amount of N/R. If positive, gain. If negative, loss.
Carrying amount of the N/R =
Principal + Accrued interest receivable - Note receivable discounted (if any)
The entries to record the discounting of a N/R (without recourse) are:
Dr. Cash at Net Proceeds, Dr. Loss on note receivable discounting (if any) at the balancing amount, Cr. N/R at Face Value, Cr. Interest Income at Accrued Interest Receivable, Cr. Gain on note receivable discounting (if any) at the balancing amount
The entries to record the discounting of a N/R with recourse, conditional sale are:
Dr. Cash at Net Proceeds, Dr. Loss on note receivable discounting (if any) at the balancing amount, Cr. N/R Discounted at Face Value, Cr. Interest Income at Accrued Interest Receivable, Cr. Gain on note receivable discounting (if any) at the balancing amount.
The N/R Discounted account is ___ from the total notes receivable when preparing the statement of financial position with ___ of the contingent liability.
deducted, disclosure
N/R Discounted is deducted from ____
total N/R
There is a ___ of the ___ liability in discounting N/R with recourse as a conditional sale.
disclosure, contingent
The entries to record the payment of the note by the maker on maturity (with recourse, conditional sale) are:
Dr. N/R Discounted at Face Value, Cr. N/R at the same amount
The entries to record the dishonoring of the maker on maturity date (with recourse, conditional sale) are:
Dr. A/R at X, Cr. Cash at X, Dr. N/R Discounted at Face Value, Cr. N/R at Face Value. X = Maturity Value + Protest Fee and bank charges (if any)
If the discounting is treated as a secured borrowing, the N/R is ____ but instead a ___ is recorded at an amount equal to the ___ of the n/r discounted
not derecognized, liability, face amount
The entries to record the discounting of a N/R with recourse, secured borrowing are:
Dr. Cash at Net Proceeds, Dr. Interest Expense at loss on note discounting (if any), Cr. Liability for n/r discounted at Face Value, Cr. Interest Income at Accrued Interest Receivable. The interest expense may be “netted” against the interest income for a net interest expense debited at the net amount because the discounting transaction is a borrowing. In secured borrowing, there is no gain/loss on discounting
The entry to record the payment of the note by the maker on maturity date are:
Dr. Liability for n/r discounted at Face Value, Cr. N/R at the same amount
The entries to record the dishonoring of the maker on maturity date (with recourse, secured borrowing) are:
Dr. A/R at X, Cr. Cash at X, Dr. Liability for n/r discounted at Face Value, Cr. N/R at Face Value. X = Maturity Value + Protest Fee and bank charges
The entries to discount own note are:
Dr. Cash at Net Proceeds, Dr. Discount on N/P at Discount, Cr. N/P-bank at Face Value.
The entry to account for interest on discounted note that the entity owns is:
Dr. Interest Expense at Discount*Time that interest accrued, Cr. Discount on N/P at the same amount. The discount on N/P is amortized using straight line method for short term N/R
PFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset when EITHER one of the following criteria is met:
- The contractual rights to the cash flows of the financial asset have expired 2. The financial asset has been transferred and the transfer qualifies for derecognition based on the extent of transfer of risks and rewards of ownership.
The contractual rights to the cash flows may expire, for example, when a N/R from a customer is ___
fully collected
PFRS 9, paragraph 3.2.6, provides the following guidelines for derecognition based on transfer of risks and rewards: 1. If the entity has transferred substantially all risks and rewards, the financial asset shall be ___. 2. If the entity has maintained substantially all risks and rewards, the financial asset shall ____. 3. If the entity has neither transferred nor retained substantially all risks and rewards, derecognition depends on ____ of the asset. If the entity ____ of the asset, the financiall asset is derecognized in its entirety. If the entity ____ over the asset, the financial asset is not derecognized.
derecognized, not be derecognized, whether the entity has retained control, has lost control, has retained control
T/F: The contractual rights to the cash flows of the N/R discounted with recourse have not yet expired, Thus the first criterion on derecognition of “transfer of risks and reqards of ownership”.
False. The first criterion does not apply.
T/F: The discounting of note with recourse falls squarely within a single guideline in the second criterion on derecognition of “transfer of risks and rewards of ownership”. If false, give the characteristics of the discounting transaction on terms of rewards, risks, and control (if any)
False it does not. The discounting transaction is a combination of the guidelines in the second criterion as follows: a. The entity has substantially transferred all rewards, b. The entity has retained substantially all risks, c. The entity has lost control of the note receivable.
The discounting of note receivable with recourse is to be accounted for as a _____with recognition of a _____. The main justification is that upon discounting or endorsement of the note receivable, whether with or without recourse, the transferor or endorser has ____ over the note receivable. Accordingly, the transferee has _______ over the note receivable because the transferee has the practical ability to sell the asset to a third party without attaching any restrictions to the transfer.
conditional sale, contingent liability, lost control, complete control
Where the note discounted is made by the party discounting, a ______, not a _____, exists. In effect, the party discounting is entering into a _____ with the endorsee
primary liability, contingent liability, contract of loan
