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Concept of Discounting:
A holder of a note can readily convert it to cash by discounting it at a bank, either with or without
recourse. The bank accepts the note and gives the holder cash equal to its maturity value less a discount
computed by a discount rate to the maturity value. The bank gets its money back plus the discount
when the note is paid by its maker at maturity. If the note is not paid at maturity, the bank can collect
from the original holder if it was discounted with recourse. If the arrangement is without recourse, the
bank must find another remedy.
Discounting without recourse- The holder/endorser is not held liable in case the maker fails to pay.
On April 1, 20xx ABC Co. received from customer a P100,000, 6-month 8% note and discounted it after
holding for 2 months. The entity discounted the note at 10%.
Solution:
Maturity Value= Principal + Interest for the full term of the note
To entry:
a. Conditional Sale
b. Secured borrowing
a. If the discounting is treated as a conditional sale of note receivable, the entry to record the
discounting is as follows:
Note is dishonored by maker: maturity value plus any costs directly attributable to the
dishonor.
- The entity pays the bank the maturity value of the note P104,000, plus protest fee
and other bank charges of P5,000.
1. Payment to the bank:
Accounts receivable 109,000
Cash 109,000
b. If the discounting is treated as a secured borrowing, the entry to record the discounting is as
follows:
Note is dishonored by maker: maturity value plus any costs directly attributable to the dishonor.
- The entity pays the bank the maturity value of the note P104,000, plus protest fee and other
bank charges of P5,000.
Cash 109,000
2. To derecognize the liability for note receivable discounted and note receivable:
A transaction wherein the maker issues a promissory note to borrow a sum of money. A liability in the
form of notes Payable is being incurred. The concept of discounting implies, that the INTEREST IS
DEDUCTED IN ADVANCE, thus the PROCEEDS from discounting were already reduced by the interest.
Illustration: On July 1, 20xx, XYZ Co. discounted its own note of P1,000,000 to a bank at 12% for one
year.
Principal 1000,000