Reference no: EM132820400

Question - CPA Inc. is experiencing financial difficulty. In order to solve the overwhelming problem of liquidity and solvency, the company uses different types of receivable financing as follows:

a. On April 1, the entity assigned 700,000 accounts receivable to a bank under a non-notification arrangement. The bank advances 80% less a service charge of 5,000. The entity signed a promissory note that provides for the interest of 1% per month on the unpaid balance. On April 5, the company issued a credit memo for sales return to a customer whose account was assigned for 20,000. On April 10, the company collected 300,000 of the assigned accounts with less 2% discount. On April 30, the company remitted the total collections to the bank plus interest for 1 month. On May 7, 15,000 worth of assigned accounts proved to be worthless. On May 20, the company collected 300,000 of the assigned accounts. On May 30, the company remitted the total amount due the bank to pay off the loan balance plus interest for one month.

Required:

I. Prepare the entries for the mentioned transactions

II. Remaining balance of Assigned Accounts to be transferred to the unassigned Accounts Receivable

b. On July 1, the company assigned 1,000,000 accounts receivable to a bank under a notification arrangement. The bank loans 80% less 4% charge on the gross amount assigned. The entity signed a promissory note that provides 1% interest per month on the unpaid loan balance. On July 31, the company received notice from the bank that 600,000 of the assigned accounts were collected less 2% discount. A check was sent to the bank for the interest. On August 31, the company received notice from the bank that 300,000 of the assigned accounts were collected. Final settlement was made by the bank for the excess collections together with uncollected assigned accounts of 100,000.

Required: I. Prepare the entries for the mentioned transactions

II. What is the amount of cash received from the bank?

III. What is the amount of assigned accounts receivable transferred to accounts receivable?

c. On October 1, the company factored 6,000,000 of accounts receivable to CFA company which has a net realizable value of P5,800,000. Control was surrendered by CPA. CFA accepted the receivables subject to recourse for non-payment. CPA assessed a fee of 3% and retains a holdback equal to 5% of the gross accounts receivable. In addition, CPA charged 15% interest computed on a weighted - average time to maturity of the receivables of 54 days.

Required: I. What is the amount of cash received by CPA?

II. What is the total cost of factoring?

d. CMA Company provides financing to other companies by purchasing their accounts receivable on a non-recourse basis. CMA charges its clients a commission of 15% on all receivables factored. In addition, CMA withholds 10% of receivables factored as protection against sales return and other adjustments. CMA credits the 10% withheld to Clients Retainer Account and makes payments to clients at the end of each month so that the balance in the retainer is equal to 10% of unpaid receivables at the end of the month. Experience has led CMA to establish an allowance for bad debts accounts of 4% of all unpaid receivables purchased. On December 1, CMA purchased receivables from CPA Company totaling 3,000,000. CPA had previously established an allowance for bad debts for these receivables at 100,000. By December 31, CMA had collected 2,500,000 on these receivables.

Required: I. Prepare the entry on CPA Company on the date of factoring

II. What is the amount of cash received by CPA?

III. What is the loss on factoring to be recognized by CPA?

e. The notes receivable of CPA consisted of the following:

1. 60-day note of 10,000 dated May 15 with a 9% interest rate, discounted at the bank on June 8 at 12%.

2. 2-year note of 100,000 (face amount) dated October 1 with no stated interest rate and a market rate of 9% interest, discounted at the bank on November 30 at 12%. This note was received from the sale of equipment.

Required: I. Prepare the entries for the discounting

II. What is the loss on discounting on a note in numbers 1 and 2, respectively?

III. What are the net proceeds on note discounting in numbers 1 and 2 respectively?