Chapter 15 Receivable Financing - Discounting of Notes Receivable

Question 1

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.

Answer 1

maker, payee, maker, payee

Question 2

When a note is ___, the payee may obtain cash before maturity date by ___ the note at a bank or other financing company.

Answer 2

negiotiable, discounting

Question 3

To discount the note, the payee must ___ it. Thus, legally, the payee becomes an ___ and the bank becomes an ___.

Answer 3

endorse, endorser, endorsee

Question 4

Endorsement may be with recourse which meant that _______ if the maker dishonors the note. This is the _____ of the endorser.

Answer 4

the endorser shall pay the endorsee, contingnet/secondary liability

Question 5

Endorsement may be without recourse, which means that the endorser avoids future liability even if _____ on the date of maturity.

Answer 5

the maker refuses to pay the endorsee

Question 6

In the absence of any evidence to the contrary, endorsement is assumed to be _____

Answer 6

with recourse

Question 7

Net Proceeds =

Answer 7

Maturity Value - Discount

Question 8

Discount =

Answer 8

Maturity Value * Discount Rate * Discount Period

Question 9

Discount Rate is the rate used by the ___ in ____ the discount. If no discount rate is given, the interest rate is ____

Answer 9

bank, computing, assumed as the discount rate.

Question 10

Discount Period is the period of time from ___ to ___

Answer 10

date of discounting, discount rate

Question 11

Maturity Value =

Answer 11

Principal * Rate * Time

Question 12

Principal is also known as as

Answer 12

Face Value

Question 13

Interest =

Answer 13

Face * Interest Rate * Time

Question 14

Interest Rate is the rate appearing on ___

Answer 14

the face of the note. Aka Stated Rate

Question 15

Time =

Answer 15

Full term of the note. The period from date of note to maturity date

Question 16

Maturity Date is the date on which ____

Answer 16

the note should be paid

Question 17

Accrued Interest Receivable is the earned interest from ___ to ____

Answer 17

date of note, date of discounting

Question 18

Gain or Loss on Note Discounting =

Answer 18

Net Proceeds - Carrying Amount of N/R. If positive, gain. If negative, loss.

Question 19

Carrying amount of the N/R =

Answer 19

Principal + Accrued interest receivable - Note receivable discounted (if any)

Question 20

The entries to record the discounting of a N/R (without recourse) are:

Answer 20

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

Question 21

The entries to record the discounting of a N/R with recourse, conditional sale are:

Answer 21

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.

Question 22

The N/R Discounted account is ___ from the total notes receivable when preparing the statement of financial position with ___ of the contingent liability.

Answer 22

deducted, disclosure

Question 23

N/R Discounted is deducted from ____

Answer 23

total N/R

Question 24

There is a ___ of the ___ liability in discounting N/R with recourse as a conditional sale.

Answer 24

disclosure, contingent

Question 25

The entries to record the payment of the note by the maker on maturity (with recourse, conditional sale) are:

Answer 25

Dr. N/R Discounted at Face Value, Cr. N/R at the same amount

Question 26

The entries to record the dishonoring of the maker on maturity date (with recourse, conditional sale) are:

Answer 26

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)

Question 27

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

Answer 27

not derecognized, liability, face amount

Question 28

The entries to record the discounting of a N/R with recourse, secured borrowing are:

Answer 28

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

Question 29

The entry to record the payment of the note by the maker on maturity date are:

Answer 29

Dr. Liability for n/r discounted at Face Value, Cr. N/R at the same amount

Question 30

The entries to record the dishonoring of the maker on maturity date (with recourse, secured borrowing) are:

Answer 30

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

Question 31

The entries to discount own note are:

Answer 31

Dr. Cash at Net Proceeds, Dr. Discount on N/P at Discount, Cr. N/P-bank at Face Value.

Question 32

The entry to account for interest on discounted note that the entity owns is:

Answer 32

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

Question 33

PFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset when EITHER one of the following criteria is met:

Answer 33

1. 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.

Question 34

The contractual rights to the cash flows may expire, for example, when a N/R from a customer is ___

Answer 34

fully collected

Question 35

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.

Answer 35

derecognized, not be derecognized, whether the entity has retained control, has lost control, has retained control

Question 36

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”.

Answer 36

False. The first criterion does not apply.

Question 37

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)

Answer 37

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.

Question 38

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.

Answer 38

conditional sale, contingent liability, lost control, complete control

Question 39

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

Answer 39

primary liability, contingent liability, contract of loan