RECEIVABLE FINANCING

QUALIFYING EXAM REVIEW

SAMPLE QUESTIONS

Receivable Financing

1. Why would a company sell receivables to another company?

I. In order to accelerate the receipt of cash from receivables.
II. Because money is tight and access to normal credit is unavailable or too expensive.
III. To avoid violating existing lending agreements.
IV. Because billing and collection of receivables are often time-consuming and costly.
a. I, II, III and IV
b. I only
c. I and II only
d. I, II and III only

Pledge

2. 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.

3. When accounts receivable are pledged, in addition to the disclosures required, total receivables
will
a. Increase
b. Decrease
c. Remain the same
d. Increase or decrease depending on the circumstances

Assignment

4. Spaghetti Co. assigned P1,000,000 of accounts receivable to Lumpia Finance Co. as security for a
loan of P840,000. Lumpia charged a 2% commission on the amount of the loan; the interest rate
on the note was 10%. During the first month, Spaghetti collected P220,000 on assigned accounts
after deducting P760 of discounts. Spaghetti accepted returns worth P2,700 and wrote off
assigned accounts totaling P7,400. Entries to record the foregoing transactions would include a
a. debit to Cash of P220,760.
b. debit to Bad Debts Expense of P7,400.
c. debit to Allowance for Doubtful Accounts of P7,400.
d. debit to Accounts Receivable of P230,860.

5. On November 30, accounts receivable in the amount of P1,800,000 were assigned to Turon
Finance Co. by Pinaypay as security for a loan of P1,500,000. Turon charged a 3% commission on
the accounts; the interest rate on the note is 12%. During December, Pinaypay collected
P700,000 on assigned accounts after deducting P1,120 of discounts. Pinaypay wrote off a P1,060
asisgned account. On December 31, Pinaypay remitted to Turon the amount collected plus one
month’s interest on the note. How much is Pinaypay’s equity in the assigned accounts
receivable as of December 31?
a. P298,940
b. P283,940
c. P282,820
d. P297,820

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 6. On December 1, Tortang Talong Company assigned on a nonnotification basis accounts
receivable of P2,500,000 to a bank in consideration for a loan of 90% of the receivables less a 5%
service fee on the accounts assigned. Tortang Talong signed a note for the bank loan. On
December 31, Tortang Talong collected assigned accounts of P1,500,000 less discount of
P100,000. Tortang Talong remitted the collections to the bank in partial payment for the loan.
The bank applied first the collection to the interest and the balance to the principal. The agreed
interest is 1% per month on the loan balance.

In its December 31 statement of financial position, Tortang Talong should report note payable as
a current liability at
a. P872,500
b. P850,000
c. P772,500
d. P1,125,000

7. On January 1, Pansit Corp. assigned P1,000,000 of accounts receivable to the Bihon Finance
Company in a transaction accounted for as a secured borrowing. Pansit gave a 14% note for
P900,000 representing 90% of the assigned accounts and received proceeds of P864,000 after
deduction of a 4% fee. On February 1, Pansit remitted P80,000 to Bihon, including interest for 1
month on the unpaid balance. Pansit’s equity in the assigned accounts receivable after the
remittance is
a. P100,000
b. P89,500
c. P136,000
d. P125,500

Factoring

8. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale, depending
upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectability and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection
period of the receivables.

Use the following information for the next two questions.

Milktea Co. factors P1,000,000 of accounts receivable. Milktea Co. transfers the receivable
records to the factor, which will receive the collections. Factor assesses a finance charge of 3
percent of the amount of accounts receivable and retains an amount equal to 5 percent of the
accounts receivable (for probable adjustments).

9. If the transfer is on a non-guarantee basis (or without recourse), which statement is correct?
a. Milktea Co. reports both a receivable and a liability of P1,000,000 in its statement of
financial position.
b. Milktea Co. records a loss of P80,000.
c. The factor’s net income will be the difference between the financing income of P30,000 and
the amount of any uncollectible receivables.
d. None of the above.

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 10. If Milktea Co. issues a guarantee to factor to compensate the factor for any credit losses on
receivables transferred, which statement is correct?
a. Milktea Co. reports both a receivable and a liability of P1,000,000 in its statement of
financial position.
b. Milktea Co. records a loss of P30,000.
c. The factor’s net income will be the difference between the financing income of P30,000 and
the amount of any uncollectible receivables.
d. None of the above.

Assignment and Factoring

11. On its second year of operations, BBQ Co. thought of expanding its business. In order to
generate additional cash necessary for this expansion, the company on September 1, factored
P400,000 of accounts receivable to Lechon Financing Co. Factoring fee was 10% of the
receivables purchased. The finance company withheld 5% of the purchase price as protection
against sales returns and allowances. On November 2, accounts receivable amounting to
P1,000,000 was assigned to Ngohiong Bank as collateral on P600,000, 20% annual interest rate
loan. A 3% finance charge was deducted in advance. As of December 31, data relating to
accounts receivable follows:
 Allowance for doubtful accounts – P13,400 (credit)
 Estimated uncollectibles – 2% of accounts receivable
 Accounts receivable excluding factored and assigned accounts accounts – P190,000
 Collections on assigned accounts – none

The total cash generated from factoring and assigning the accounts receivable was
a. P804,000
b. P912,000
c. P922,000
d. P932,000

Discounting

12. On September 30, 22, Choco Lanay Company discounted at the bank a customer’s P2,500,000 6-
month 10% note receivable dated June 30, 2020. The bank discounted the note at 12%. The
proceeds from this discounted note amounted to
a. P2,546,250
b. P2,625,000
c. P2,421,000
d. P2,585,000

Discounting - Without Recourse

Use the following information for the next three questions.

The Cake Department Store wishes to discount a note receivable arising from the sale of
merchandise in order to meet maturing obligations. The note has a face amount of P100,000.
The note bears interest of 12% and is due in one year. The bank rate in discounting notes is 12%.
Assuming that the note was discounted ten months prior to maturity.

13. The proceeds from the discounted note amounted to

a. P112,000
b. P102,000
c. P100,800
d. P100,000

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 14. If the note discounting is treated as a sale without recourse, the loss on discounting is
a. P2,000
b. P1,200
c. P800
d. P0

Discounting – With Recourse

15. Which statement is incorrect if the note discounting is treated as borrowing?

a. The entity shall continue to recognize the note receivable in its entirety.
b. The entity shall recognize a financial liability for the consideration received.
c. The entity shall report net interest income of P800.
d. None of the above.

16. On May 17, Saging Co. accepted a P13,000, 8%, 90-day note from a customer. On June 11, the
notes was discounted at 10%. At maturity date, the note was dishonored and the bank charged
a P50 protest fee. The amount that Saging Co. would debit to Notes Receivable Dishonored is:
a. P13,310
b. P13,050
c. P13,070
d. P12,260

17. An entity shall disclose information that enables users of its financial statements.
a. To understand the relationship between transferred financial assets that are not
derecognized in their entirety and the associated liabilities.
b. To evaluate the nature of, and risks associated with, the entity’s continuing involvement in
derecognized financial assets.
c. Both a and b.
d. Neither a nor b.