Name: JOJIE A.
DADOR Course & Year: BSBA 3rd Year
Subject: Elective 1 – Treasury Management Assignment 3
Problem 9-2 (IAA)
Morale Company provided the following transactions:
March 14 Sale of merchandise, P2,050,000 to a customer. FOB destination 2/10, n/30
April 7 Receipt of a 60-day, 12% note dated April 5 from the customer. The face of the
note was the amount of the invoice minus freight charge of P50,000 paid by the
customer in connection with the March 14 sale.
20 The note of the customer was discounted with the bank at 15%
June 4 Receipt of notification from bank that the customer dishonored the note.
According, the entity paid the bank the amount due including protest fee and
other charges of P 10,000
July 4 Receipt of cash from the customer for the full amount of indebtedness plus
interest on the original face value.
Required:
Prepare journal entries to record the transaction assuming any discounting of note receivable is
accounted for as a conditional sale with recognition of a contingent liability.
Mar 14 Accounts Receivable 2,050,000
Sales 2,050,000
April 7 Notes Receivable 2,000,000
Freight Out 50,000
Accounts Receivable 2,050,000
April 20 Cash 2,001,750
Loss on discounting 8,250
Notes receivable discounted 2,000,000
Interest income 10,000
June 4 Accounts Receivable (2,040,000+10,000) 2,050,000
Cash 2,050,000
Notes receivable discounted 2,000,000
Notes receivable 2,000,000
July 4 Cash 2,070,000
Accounts Receivable 2,050,000
Interest income (2Mx12%x30/360) 20,000
Tender Company accepted from a customer a P 4,000,000 90 day, 12% noted August 31, 2020.
On September 30, 2020, the entity discounted without recourse the note at 15% However the
proceeds were not received until October 1, 2020.
1. What amount was received from the note receivable discounting?
a. 4,017,000
b. 4,120,000
c. 4,103,000
d. 3,965,500
2. What amount should be reported as loss on note receivable discounting?
a. 17,000
b. 23,000
c. 40,000
d. 0
DISCOUNTING OF NOTES RECEIVABLE WITH RECOURSE
Endorsement may be with recourse which means that the endorser shall pay the endorsee if
the maker dishonors the note. In the accounting parlance this is the contingent liability of the
endorser.
If the discounting is with recourse, the transaction is accounted for as either of the following:
a. Conditional sale of note receivable recognizing a contingent liability
b. Secured borrowing
Illustration
Song Kang Company provided the following data for current year.
June 1 Received from AAA Company a P5,000,000, 12% 90-day note for merchandise
Sold.
July 1 Discounted the AAA Company note at the bank at 12%
July 1 Received from BBB Company a P6,000,000, 10% 60-day note in full payment on
an account
July 16 Discounted the BBB Company note at the bank at 12%
August 30 The bank notified Song kang Company that the BBB Company note was paid
August 30 The bank notified Song Kang Company that AAA Company defaulted on the note
and charged the amount of principal, interest and a fee of Php20,000 against Song Kang’s bank
account
December 30 Received full payment from AAA Company for the dishonored note plus 12%
annual interest on the total amount due for four months
Prepare journal entries to record the transactions on the assumption that
a. The discounting is accounted for as a conditional sale of notes receivable recognizing a
contingent liability
b. The discounting is accounted for as a Secured borrowing
A. The discounting is accounted for as a conditional sale of notes receivable recognizing a
contingent liability
June 1 Accounts Receivable 5,000,000
Sales 5,000,000
Notes receivable 5,000,000
Accounts Receivable 5,000,000
July 1 Cash 5,047,000
Loss on discounting 3,000
Notes receivable discounted 5,000,000
Interest income 50,000
July 1 Notes receivable 6,000,000
Accounts receivable 6,000,000
July 16 Cash 6,008,500
Loss on discounting 16,500
Notes receivable discounted 6,000,000
Interest income 25,000
August 30 No entry
August 30 Accounts Receivable (6.1M+20K) 6,120,000
Cash 6,120,000
Notes Receivable discounted 6,000,000
Notes receivable 6,000,000
December 30 Cash 6,360,000
Accounts Receivable 6,120,000
Interest income (6Mx12%*4/12) 240,000
B. Secured borrowing entries
July 1 Cash 5,047,000
Interest expense 3,000
Liability for notes receivable discounted 5,000,000
Interest income 50,000
July 16 Cash 6,008,500
Interest expense 16,500
Liability for notes receivable discounted 6,000,000
Interest income 25,000
August 30 Liability for notes receivable discounted 5,000,000
Notes receivable 5,000,000
December 30 Liability for notes receivable discounted 6,000,000
Notes receivable 6,000,000
