Receivables: Factoring Practical Exam

August 16, 2026 The Rooted CPA

PROBLEM 1 (Casual Factoring with Allowance)

On November 1, 2024, a real estate developer factored ₱850,000 of accounts receivable to a bank. The accounts had an existing allowance for doubtful accounts of ₱40,000. The bank paid the developer ₱780,000 cash.

What amount of loss on factoring should the developer recognize?

A) ₱30,000
B) ₱70,000
C) ₱110,000
D) ₱40,000

Answer: A) ₱30,000
Solution: Net carrying amount = ₱850,000 – ₱40,000 = ₱810,000. Loss = ₱810,000 – ₱780,000 = ₱30,000.

PROBLEM 2 (Continuing Factoring – Basic Cash Proceeds)

A retail chain factored ₱1,200,000 of accounts receivable under a continuing agreement. The factor charges a 6% commission on the gross amount and withholds 15% as holdback. Credit terms are 3/15, n/60, and the customer takes the discount.

How much net cash did the retailer receive initially?

A) ₱1,128,000
B) ₱912,000
C) ₱1,020,000
D) ₱972,000

Answer: B) ₱912,000
Solution: Holdback (15% × 1.2M = 180,000); Commission (6% × 1.2M = 72,000); Discount (3% × 1.2M = 36,000). Cash = 1,200,000 – 180,000 – 72,000 – 36,000 = ₱912,000.

PROBLEM 3 (Continuing Factoring – Final Settlement)

A manufacturing company factored ₱600,000 of receivables. Factor charged 4% commission, withheld 10% holdback, terms 2/10, n/30. A customer was allowed a credit of ₱80,000 for damaged goods. No further returns occur.

How much cash will the company finally receive from the factor upon final settlement?

A) ₱60,000
B) ₱20,000
C) ₱0 (company owes factor ₱18,400)
D) ₱18,400

Answer: C) ₱0 (company owes factor ₱18,400)
Solution: Initial holdback = 10% × 600,000 = ₱60,000. Reduction for return = ₱80,000 – (2% × 80,000 = 1,600) = ₱78,400. Since ₱78,400 > ₱60,000, the company has a net payable of ₱18,400 to the factor.

PROBLEM 4 (With Recourse – Initial Loss Recognition)

A pharmaceutical company factored ₱4,000,000 of receivables with recourse. Fair value of recourse obligation is ₱150,000. Factor fee is 5%, holdback is 8%, and interest is 10% on a weighted-average time of 60 days.

What is the total loss on factoring recognized initially? (Use 365 days)

A) ₱415,753
B) ₱265,753
C) ₱200,000
D) ₱150,000

Answer: A) ₱415,753
Solution: Interest = 4,000,000 × 10% × 60/365 = ₱65,753. Initial loss = Fee (5% × 4M = 200,000) + Interest (65,753) + Recourse obligation (150,000) = ₱415,753.

PROBLEM 5 (With Recourse – Full Collection Reversal)

Using the data from Problem 4, assume the factor collects 100% of the receivables.

What is the net loss on factoring after the recourse liability is reversed?

A) ₱415,753
B) ₱265,753
C) ₱200,000
D) ₱150,000

Answer: B) ₱265,753
Solution: Net loss = Initial loss (₱415,753) – Reversal of recourse liability (₱150,000) = ₱265,753.

PROBLEM 6 (With Recourse – Default / Compound Settlement)

An entity factored ₱2,500,000 of receivables with recourse (FV = ₱120,000). Factor withheld 12% holdback, charged 7% commission, and 9% interest (weighted avg 45 days). All customers default; the entity settles the recourse obligation, and the factor releases the holdback.

What is the net cash received from the factor upon final compound settlement?

A) ₱180,000
B) ₱300,000
C) ₱120,000
D) ₱420,000

Answer: A) ₱180,000
Solution: Holdback = 12% × 2.5M = ₱300,000. Net cash from factor = Holdback (300,000) – Recourse liability (120,000) = ₱180,000. (Compound entry: Dr. Cash 180,000; Dr. Recourse Liability 120,000; Cr. Due from Factor 300,000).

I added explanation here for your reference:

What does “all customers default” mean?

In Problem 6, the entity factored ₱2,500,000 of accounts receivable to a factor with recourse.

“Default” means the customers did not pay the factor when their accounts became due.
Since the arrangement is “with recourse”, the factor has the right to go back to the original entity (the seller) to collect the money. The entity is legally obligated to reimburse the factor for the uncollected receivables.
However, the factor is already holding the “Factor’s Holdback” (₱300,000) as protection against exactly this situation.

Instead of the entity paying cash out-of-pocket for the full ₱2,500,000, the factor simply keeps the holdback and the entity pays only the fair value of the recourse obligation (₱120,000) to settle the liability. Per your book: “the factor deducts the recourse liability from the factor’s holdback upon final settlement.”

Step 1: Recompute the Initial Journal Entry (Day 1)

Here are the given facts for Problem 6:

Accounts Receivable factored = ₱2,500,000
Recourse obligation (FV) = ₱120,000
Holdback (12% × 2,500,000) = ₱300,000
Commission (7% × 2,500,000) = ₱175,000
Interest (9% × 2,500,000 × 45/365) = ₱27,740 (using 365 days per book rule)

Cash Proceeds:

₱2,500,000 (Gross AR)
 -  300,000 (Holdback)
 -  175,000 (Commission)
 -   27,740 (Interest)
 = ₱1,997,260 (Net Cash)

Initial Journal Entry (To record the factoring on Day 1):

Account	Debit	Credit
Cash	₱1,997,260
Due from Factor (Holdback)	₱300,000
Factoring Fee (Commission)	₱175,000
Interest Expense	₱27,740
Loss on Recourse Obligation	₱120,000
		Accounts Receivable	₱2,500,000
		Recourse Liability	₱120,000

Step 2: What happens when “All Customers Default”?

Since all customers default, the factor collects exactly ₱0 from the customers.

The factor exercises the recourse provision.
The factor will keep the ₱300,000 holdback to cover part of the loss.
The entity must settle the recourse liability of ₱120,000.

Step 3: Journal Entries for the Default Settlement

Following your book’s exact mechanics (page 167: “Assuming the accounts are not collected by the factor. To settle the recourse obligation… The two entries can be compounded.”):

Option A: Two Separate Entries

Entry	Account	Debit	Credit
Entry 1: To settle the recourse obligation	Recourse Liability	₱120,000
		Cash	₱120,000
Entry 2: To collect the factor’s holdback	Cash	₱300,000
		Due from Factor	₱300,000

Option B: Compound Entry (Recommended per your book)

Since the factor simultaneously keeps the holdback and collects the recourse liability from you, the net effect is:

Factor returns to you: Holdback (₱300,000) minus Recourse Liability (₱120,000) = ₱180,000 net cash.

Account	Debit	Credit
Cash	₱180,000
Recourse Liability	₱120,000
		Due from Factor	₱300,000

Final Summary of the Entire Transaction (Problem 6)

Date	Event	Journal Entry
Day 1	Initial Factoring	Dr. Cash 1,997,260; Dr. Due from Factor 300,000; Dr. Factoring Fee 175,000; Dr. Interest Expense 27,740; Dr. Loss on Recourse 120,000 Cr. AR 2,500,000; Cr. Recourse Liability 120,000
At Maturity	All customers default; factor keeps holdback to settle recourse	Compound Entry: Dr. Cash 180,000 Dr. Recourse Liability 120,000 Cr. Due from Factor 300,000

The net effect is:

You received ₱1,997,260 initially.
You receive an additional ₱180,000 at final settlement.
Total cash received = ₱2,177,260.
Total loss = ₱2,500,000 (AR) – ₱2,177,260 (total cash received) = ₱322,740 final net loss (which matches the book’s logic of Fee + Interest + Net recourse impact).

PROBLEM 7 (Without Recourse – Casual)

A construction firm factored ₱740,000 of accounts receivable without recourse for ₱650,000 cash. The accounts had an allowance for doubtful accounts of ₱30,000.

What is the loss on factoring?

A) ₱90,000
B) ₱60,000
C) ₱30,000
D) ₱0

Answer: B) ₱60,000
Solution: Net carrying amount = ₱740,000 – ₱30,000 = ₱710,000. Loss = ₱710,000 – ₱650,000 = ₱60,000.

PROBLEM 8 (Interest – 360 vs 365 Days)

A company factored ₱1,500,000 to a factor at 12% interest. Average maturity is 90 days.

What is the difference in interest between using the default denominator (360 days) and the weighted-average denominator (365 days)?

A) ₱616
B) ₱1,500
C) ₱45,000
D) ₱44,384

Answer: A) ₱616
Solution: 360-day interest = 1.5M × 12% × 90/360 = ₱45,000. 365-day interest = 1.5M × 12% × 90/365 = ₱44,384. Difference = ₱616.

PROBLEM 9 (Continuing – Compute Cash Proceeds)

An entity factored ₱900,000 of receivables. Factor charges 5.5% commission, withholds 18% holdback. Credit terms are 2/10, n/30, and the customer takes the discount.

What is the amount of cash initially received?

A) ₱670,500
B) ₱688,500
C) ₱706,500
D) ₱738,000

Answer: A) ₱670,500
Solution: Discount = 2% × 900,000 = 18,000; Commission = 5.5% × 900,000 = 49,500; Holdback = 18% × 900,000 = 162,000. Cash = 900,000 – 18,000 – 49,500 – 162,000 = ₱670,500.

PROBLEM 10 (Factoring vs. Assignment Conceptual)

On the same day, Company A assigned ₱1,000,000 of specific receivables for an 80% advance, and Company B factored ₱1,000,000 of receivables with a 10% holdback and 4% commission (no discount/interest).

Which statement is correct based on the book’s definitions?

A) Company A recognizes a loss of ₱200,000; Company B recognizes a loss of ₱140,000.
B) Company A receives ₱800,000 cash and recognizes a liability; Company B receives ₱860,000 cash and recognizes a loss.
C) Both companies receive the same cash and recognize the same loss.
D) Company A recognizes a gain, while Company B recognizes a loss.

Answer: B) Company A receives ₱800,000 cash and recognizes a liability; Company B receives ₱860,000 cash and recognizes a loss.
Solution: Assignment is a loan (cash ₱800,000, liability ₱800,000). Factoring is a sale: cash = 1,000,000 – 100,000 – 40,000 = ₱860,000, with a loss recognized.

PROBLEM 11 (Net Loss after Reversal – Large Numbers)

An entity factored ₱5,000,000 of receivables with recourse (FV = ₱250,000). Fee = 6%, interest = ₱70,000 (already computed), holdback = 10%. The factor collects all receivables.

What is the final net loss on factoring?

A) ₱620,000
B) ₱370,000
C) ₱250,000
D) ₱870,000

Answer: B) ₱370,000
Solution: Initial loss = Fee (6% × 5M = 300,000) + Interest (70,000) + Recourse (250,000) = ₱620,000. Net loss = ₱620,000 – ₱250,000 (reversal) = ₱370,000.

PROBLEM 12 (Complex Entry – Cash Proceeds)

A garment factory factored ₱1,800,000 of receivables with terms 2/15, n/45. Factor charges 5% commission, 12% holdback, and advances the full amount less deductions.

What is the amount debited to Cash in the journal entry?

A) ₱1,458,000
B) ₱1,710,000
C) ₱1,584,000
D) ₱1,674,000

Answer: A) ₱1,458,000
Solution: Discount = 2% × 1.8M = 36,000; Commission = 5% × 1.8M = 90,000; Holdback = 12% × 1.8M = 216,000. Cash = 1,800,000 – 36,000 – 90,000 – 216,000 = ₱1,458,000.

PROBLEM 13 (Final Settlement with Partial Returns)

An entity factored ₱750,000 of receivables. Factor charged 6% commission and held back 20%. Credit terms 2/10, n/30. The factor collected ₱550,000 with no discounts, but customers returned ₱50,000.

How much cash does the entity receive from the factor upon final settlement?

A) ₱150,000
B) ₱100,000
C) ₱50,000
D) ₱200,000

Answer: B) ₱100,000
Solution: Initial holdback = 20% × 750,000 = ₱150,000. Return reduces holdback by ₱50,000. Remaining holdback = ₱150,000 – ₱50,000 = ₱100,000 cash received.

PROBLEM 14 (Theory – Denominator Rules)

Company X factored receivables with a “weighted-average time to maturity of 75 days” at 15% interest. Company Y factored receivables with a “simple interest rate of 15% for 75 days” (no weighted-average specification).

If the principal is ₱2,000,000, what are the respective interest amounts for Company X and Company Y?

A) X = ₱62,500; Y = ₱61,644
B) X = ₱61,644; Y = ₱62,500
C) X = ₱62,500; Y = ₱62,500
D) X = ₱61,644; Y = ₱61,644

Answer: B) X = ₱61,644; Y = ₱62,500

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