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(1)
Discounting of Receivables – Notes payable transactions
Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs. The principal and interest payments are made as per the following note indenture:
- The issuer agrees to pay total amount on certain terms to the payee.
- The interest is paid on the face value of the notes payable.
To prepare: The
(1)
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Explanation of Solution
Alternative (a):
To record the signing of notes payable:
Date | Accounts and Explanations | Post Ref. | Debit ($) |
Credit ($) | |
2018 | |||||
July | 1 | Cash | 500,000 | ||
Notes Payable | 500,000 | ||||
(To record issuance of notes payable) |
Table (1)
Alternative (b):
Discounting of Receivables: It is another method of financing of receivables. In this method a company may discounts its invoices or promissory notes in any financing company. The financing company deducts some discount and pays the balance amount to that Company.
Discounting of Notes Receivable:
To record the transfer of receivable:
Date | Accounts and Explanations | Post Ref. | Debit ($) |
Credit ($) | |
2018 | |||||
July | 1 | Cash (2) | 539,000 | ||
Loss on transfer of Notes receivable (1) | 11,000 | ||||
Notes Receivable | 550,000 | ||||
(To record Transfer of Notes receivable) |
Table (2)
Working notes:
Compute the amount of loss on transfer of notes receivable:
Compute the amount of cash proceeds:
(2)
Alternative (a&b)
To Prepare: The necessary journal entries to record the collection and the remittance to the bank.
(2)
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Explanation of Solution
Cash Collection entry:
Date | Accounts and Explanations | Post Ref. | Debit ($) |
Credit ($) | |
2018 | |||||
July | Cash | 624,000 | |||
624,000 | |||||
(To record the collection from receivables.) |
Table (3)
Working notes:
Compute the amount of cash collected from accounts receivable:
Cash Remittance entry for accounts payable:
Date | Accounts and Explanations | Post Ref. | Debit ($) |
Credit ($) | |
2018 | |||||
July | 31 | Notes Payable | 500,000 | ||
Interest Expense (3) | 5,000 | ||||
Cash | 505,000 | ||||
(To record the collection from receivables.) |
Table (4)
Working notes:
Compute the amount of interest expense:
Out of total receivables of $780,000, the bank held the receivables amounted to $550,000 as the company has transferred it. Hence, the accounts receivables amounted to
Cash Collection entry:
Date | Accounts and Explanations | Post Ref. | Debit ($) |
Credit ($) | |
2018 | |||||
July | 31 | Cash | 184,000 | ||
Accounts Receivable | 184,000 | ||||
(To record the collection from receivables.) |
Table (5)
Compute the amount of cash collected from accounts receivable:
(3)
To explain: The required note disclosure that would be included in the July 31, 2018.
(3)
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Explanation of Solution
For Alternative (a):
The notes payable amounted $500,000 is required to disclose for the assignment of accounts receivable as collateral.
For Alternative (b):
As the transfer of receivable was made without resource, no disclosure is required.
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Intermediate Accounting
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