Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2920-Generating Cash from Receivables OCTOBER 2020

DISCUSSION PROBLEMS
1. Why would a company sell receivables to another 2. An entity shall derecognize a financial asset when, and
company? only when:
I. In order to accelerate the receipt of cash from a. The contractual rights to the cash flows from the
receivables. financial asset expire.
II. Because money is tight and access to normal b. The entity transfers the financial asset and the
credit is unavailable or too expensive. transfer qualifies for derecognition.
III. To avoid violating existing lending agreements. c. Either a or b.
IV. Because billing and collection of receivables are d. Neither a nor b.
often time-consuming and costly.
3. An entity transfers a financial asset if, and only if, it
a. I, II, III and IV
a. Transfers the contractual rights to receive the cash
b. I only
flows of the financial asset.
c. I and II only
b. Retains the contractual rights to receive the cash
d. I, II and III only
flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one
LECTURE NOTES: or more recipients in an arrangement that meets
the “pass-through” conditions.
Financial asset derecognition flow chart c. Either a or b.
d. Neither a nor b.

4. When an entity retains the contractual rights to receive

the cash flows of a financial asset (the ‘original asset’),
but assumes a contractual obligation to pay those cash
flows to one or more entities (the ‘eventual
recipients’), the entity treats the transaction as a
transfer of a financial asset if, and only if, certain
conditions are met including
a. The entity has no obligation to pay amounts to the
eventual recipients unless it collects equivalent
amounts from the original asset.
b. The entity is prohibited by the terms of the
transfer contract from selling or pledging the
original asset other than as security to the
eventual recipients for the obligation to pay them
cash flows.
c. The entity has an obligation to remit any cash
flows it collects on behalf of the eventual recipients
without material delay.
d. All of these.

5. How is transfer of risks and rewards evaluated?

a. By comparing the entity’s exposure, before and
after the transfer, with the variability in the
amounts and timing of the net cash flows of the
transferred asset.
b. By determining the transferee’s ability to sell the
asset.
c. Either a or b.
d. Neither a nor b.

6. Examples of when an entity has retained substantially

all the risks and rewards of ownership of transferred
financial asset include
a. A sale and repurchase transaction where the
repurchase price is a fixed price or the sale price
plus a lender’s return.
b. A sale of a financial asset together with a total
return swap that transfers the market risk
exposure back to the entity.
c. A sale of short-term receivables in which the entity
guarantees to compensate the transferee for credit
losses that are likely to occur.
d. All of these.

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7. Which of the following transfers qualify for b. Continue to recognize the financial asset.
derecognition? c. Determine whether it has retained control of the
a. An entity sells a financial asset with a carrying financial asset.
amount of P100,000 for P143,000. On the date of d. Continue to recognize the transferred asset to the
sale, the entity enters into an agreement with the extent of its continuing involvement.
buyer to repurchase the asset in three months for
P145,000. 10. An entity has not retained control of a transferred
b. An entity sells a financial asset with a carrying asset if
amount of P500,000 for P600,000 and a. The transferee has the practical ability to sell the
simultaneously enters into a total return swap with transferred asset.
the buyer under which the buyer will return any b. The transferee does not have the practical ability
increases in value to the entity and the entity will to sell the transferred asset.
pay the buyer interest plus compensation for any c. The entity retains an option to repurchase the
decreases in the value of the investment. The transferred asset and the transferee cannot readily
entity expects the fair value of the financial asset obtain the transferred asset in the market if the
to decrease by P40,000. entity exercises its option.
c. An entity sells a portfolio of short-term accounts d. A put option or guarantee constrains the transferee
receivables carried on its books at P2,100,000 for from selling the transferred asset.
P2,000,000 and promises to pay up to P60,000 to
compensate the buyer if and when any defaults 11. Which statement is incorrect if an entity neither
occur. Expected credit losses are significantly less transfers nor retains substantially all the risks and
than P60,000, and there are no other significant rewards of ownership of a transferred asset, and
risks. retains control of the transferred asset?
d. None of the above. a. The entity continues to recognize the transferred
asset to the extent to which it is exposed to
8. Which statement is incorrect regarding transfers that changes in the value of the transferred asset.
do not qualify for derecognition because the entity has b. When an entity continues to recognize an asset to
retained substantially all the risks and rewards of the extent of its continuing involvement, the entity
ownership of the transferred asset? also recognizes an associated liability.
a. The entity shall continue to recognize the c. The transferred asset and the associated liability
transferred asset in its entirety. are measured on a basis that reflects the rights
b. The entity shall recognize a financial liability for the and obligations that the entity has retained.
consideration received. d. The entity shall offset any income arising from the
c. In subsequent periods, the entity shall recognize transferred asset with any expense incurred on the
any income on the transferred asset and any associated liability.
expense incurred on the financial liability
d. The asset and the associated liability shall be 12. Bago Company sells a portfolio of short-term accounts
offset. receivable with a carrying amount of P900,000 for
P1,000,000 and promises to pay up to P30,000 to
LECTURE NOTES: compensate the buyer if and when any defaults occur.
Bago Company neither transfers nor retains
Accounting for transfers of receivables
substantially all the risks and rewards of ownership of
the transferred asset, and retains control of the
transferred asset. How much should be recognized as
continuing involvement in the receivables?
a. P1,000,000 c. P30,000
b. P 900,000 d. P 0

13. Which statement is incorrect regarding pledge of

accounts receivable?
a. New receivables can be substituted for the ones
collected.
b. The accounts pledged are not transferred to a
special ledger control account.
c. No special accounting for the borrowing is needed.
d. Does not require note disclosure relating to details
of transaction.

LECTURE NOTES:
Pledge vs Assignment

9. If an entity neither transfers nor retains substantially

all the risks and rewards of ownership of a transferred
asset, the entity shall
a. Derecognize the financial asset and recognize
separately as assets or liabilities any rights and
obligations created or retained in the transfer.

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14. Sipalay Co. assigned P500,000 of accounts receivable LECTURE NOTES:

to Hinigaran Finance Co. as security for a loan of
Accounting for transfers of receivables – US GAAP
P420,000. Hinigaran charged a 2% commission on the
amount of the loan; the interest rate on the note was
10%. During the first month, Sipalay collected
P110,000 on assigned accounts after deducting P380
of discounts. Sipalay accepted returns worth P1,350
and wrote off assigned accounts totaling P3,700.
Entries to record the foregoing transactions would
include a
a. debit to Cash of P110,380.
b. debit to Bad Debts Expense of P3,700.
c. debit to Allowance for Doubtful Accounts of P3,700.
d. debit to Accounts Receivable of P115,430.

15. On November 30, accounts receivable in the amount of

P900,000 were assigned to Kaban Finance Co. by
Kalan as security for a loan of P750,000. Kaban
charged a 3% commission on the accounts; the
interest rate on the note is 12%. During December,
Kalan collected P350,000 on assigned accounts after
deducting P560 of discounts. Kalan wrote off a P530
assigned account. On December 31, Kalan remitted to Use the following information for the next three questions.
Kaban the amount collected plus one month's interest
on the note. The Hinoba-an Department Store wishes to discount a note
receivable arising from the sale of merchandise in order to
How much is Kalan’s equity in the assigned accounts meet some maturing obligations. The note has a face
receivable as of December 31? amount of P50,000. The note bears interest of 12% and is
a. P149,470 c. P141,410 due in one year. The bank rate in discounting notes is
b. P141,970 d. P148,910 12%. Assuming that the note was discounted ten months
prior to maturity.
Use the following information for the next two questions.
Entity A factors P500,000 of accounts receivable. Entity A 19. The proceeds from this discounted note amounted to
transfers the receivable records to the factor, which will a. P56,000 c. P50,400
receive the collections. Factor assesses a finance charge of b. P51,000 d. P50,000
3 percent of the amount of accounts receivable and retains
an amount equal to 5 percent of the accounts receivable 20. If the note discounting is treated as a sale without
(for probable adjustments). recourse, the loss on discounting is
a. P1,000 c. P400
16. If the transfer is on a non-guarantee (or without b. P 600 d. P 0
recourse) basis, which statement is correct?
a. Entity A reports both a receivable and a liability of 21. Which statement is incorrect if the note discounting is
P500,000 in its statement of financial position. treated as borrowing?
b. Entity A records a loss of P40,000. a. The entity shall continue to recognize the note
c. The factor’s net income will be the difference receivable in its entirety.
between the financing income of P15,000 and the b. The entity shall recognize a financial liability for the
amount of any uncollectible receivables. consideration received.
d. None of the above. c. The entity shall report net interest income of P400.
d. None of the above.
17. If Entity A issues a guarantee to factor to compensate
the factor for any credit losses on receivables 22. On May 17, Sagay Co. accepted a P6,500, 8%, 90-day
transferred, which statement is correct? note from a customer. On June 11, the note was
a. Entity A reports both a receivable and a liability of discounted at 10%. At maturity date, the note was
P500,000 in its statement of financial position. dishonored and the bank charged a P25 protest fee.
b. Entity A records a loss of P15,000. The amount that Sagay Co. would debit to Notes
c. The factor’s net income will be the difference Receivable Dishonored is:
between the financing income of P15,000 and the a. P6,655 c. P6,535
amount of any uncollectible receivables. b. P6,525 d. P6,130
d. None of the above.
23. An entity shall disclose information that enables users
18. Sleeping Corporation factored P600,000 of accounts of its financial statements
receivable to Beauty Finance Co. Control was a. To understand the relationship between transferred
surrendered by Sleeping. Beauty accepted the financial assets that are not derecognized in their
receivables subject to recourse for nonpayment. entirety and the associated liabilities.
Beauty assessed a fee of 3% and retains a holdback b. To evaluate the nature of, and risks associated
equal to 5% of the accounts receivable. In addition, with, the entity’s continuing involvement in
Beauty charged 15% interest computed on a weighted- derecognized financial assets.
average time to maturity of the receivables of 54 days. c. Both a and b.
The fair value of the recourse obligation is P9,000. d. Neither a nor b.
The loss on factoring to be recognized by Sleeping
Corporation is - now do the DIY drill -
a. P31,315 c. P61,315
b. P40,315 d. P70,315

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EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

1. Examples of when an entity has transferred In its December 31 statement of financial position,
substantially all the risks and rewards of ownership of Caoayan should report note payable as a current
transferred financial asset do not include liability at
a. An unconditional sale of a financial asset. a. P1,745,000 c. P1,545,000
b. A sale of a financial asset together with an option b. P1,700,000 d. P2,250,000
to repurchase the financial asset at its fair value at
the time of repurchase. 7. Which of the following is true when accounts receivable
c. A sale of a financial asset together with a put or are factored without recourse?
call option that is deeply out of the money a. The transaction may be accounted for either as a
d. A sale of a financial asset together with a total secured borrowing or as a sale, depending upon
return swap that transfers the market risk the substance of the transaction.
exposure back to the entity. b. The receivables are used as collateral for a
promissory note issued to the factor by the owner
2. If an entity neither transfers nor retains substantially of the receivables.
all the risks and rewards of ownership of a transferred c. The factor assumes the risk of collectibility and
asset, and retains control of the transferred asset, the absorbs any credit losses in collecting the
entity continues to recognize the transferred asset to receivables.
the extent of its continuing involvement. The extent of d. The financing cost (interest expense) should be
the entity’s continuing involvement in the transferred recognized ratably over the collection period of the
asset is the extent to which it is exposed to changes in receivables.
the value of the transferred asset. When the entity’s
continuing involvement takes the form of guaranteeing 8. Otter Company sold receivables with recourse for
the transferred asset, the extent of the entity’s P530,000. Otter received P500,000 cash immediately
continuing involvement is from the factor. The remaining P30,000 will be
a. The amount of the asset. received once the factor verifies that none of the
b. The maximum amount of the consideration receivables is in dispute. Control was surrendered by
received that the entity could be required to repay Otter. The receivables had a face amount of
(‘the guarantee amount’). P600,000; Otter had previously established an
c. The lower of a and b. Allowance for Bad Debts of P25,000 in connection with
d. The higher of a and b. these receivables. The fair value of the recourse
obligation is P13,000. The loss on factoring to be
3. Which of the following is a method to generate cash recognized by Otter Company is
from accounts receivables? a. P88,000 c. P45,000
Assignment Factoring b. P58,000 d. P83,000
a. Yes Yes
b. Yes No 9. On its second year of operations, Victorias Co. thought
c. No Yes of expanding its business. In order to generate
d. No No additional cash necessary for this expansion, the
company on September 1, factored P200,000 of
4. When accounts receivable are pledged, in addition to accounts receivable to Escalante Finance Co. Factoring
the disclosures required, total receivables will fee was 10% of the receivables purchased. The
a. Increase. Finance Co. withheld 5% of the purchase price as
b. Decrease. protection against sales returns and allowances. On
c. Remain the same. November 2, accounts receivable amounting to
d. Increase or decrease depending on the P500,000 was assigned to La Carlota Bank as collateral
circumstances. on P300,000, 20% annual interest rate loan. A 3%
finance charge was deducted in advance. As of
5. On January 1, Binal Corp. assigned P500,000 of December 31, data relating to accounts receivable
accounts receivable to the Bagan Finance Company in follows:
a transaction accounted for as a secured borrowing. • Allowance for doubtful accounts – P6,700 (credit)
Binal gave a 14% note for P450,000 representing 90% • Estimated uncollectibles – 2% of accounts
of the assigned accounts and received proceeds of receivable
P432,000 after deduction of a 4% fee. On February 1, • Accounts receivable excluding factored and
Binal remitted P80,000 to Bagan, including interest for assigned accounts – P95,000
1 month on the unpaid balance. Binal’s equity in the • Collections on assigned accounts – none
assigned accounts receivable after the remittance is
The total cash generated from factoring and assigning
a. P50,000 c. P68,000
the accounts receivable was
b. P44,750 d. P62,750
a. P402,000 c. P461,000
b. P456,000 d. P466,000
6. On December 1, Caoayan Company assigned on a
nonnotification basis accounts receivable of
10. On September 30, 2020, Dumalneg Company
P5,000,000 to a bank in consideration for a loan of
discounted at the bank a customer’s P5,000,000 6-
90% of the receivables less a 5% service fee on the
month 10% note receivable dated June 30, 2020. The
accounts assigned. Caoayan signed a note for the
bank discounted the note at 12%. The proceeds from
bank loan. On December 31, Caoayan collected
this discounted note amounted to
assigned accounts of P3,000,000 less discount of
a. P5,092,500 c. P4,842,000
P200,000. Caoayan remitted the collections to the
b. P5,250,000 d. P5,170,000
bank in partial payment for the loan. The bank applied
first the collection to the interest and the balance to
J - end of FAR.2920 - J
the principal. The agreed interest is 1% per month on
the loan balance.

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