Question

OnJanuary1,2019,KisumuLimitedCo.purchasedKshs160,000of6%bondsfor€168,300(a
5%effectiveinterestrate)asanon-tradinginvestment.InterestispaidonJuly1andJanuary1
andthebondsmatureonJanuary1,2024.
Required:
(a)PreparethejournalentryonJanuary1,2019. (2marks)
(b)ThebondsaresoldonNovember1,2019at105plusaccruedinterest.Recordamortization
andinterestrevenueontheappropriatedatesbytheeffective-interestmethod(roundtothe
nearestdollar).Prepareallentriesrequiredtoproperlyrecordthesale.
(6marks)
(c)Statefourreasonsthatmakecompaniestransferorsellreceivablestoother
companies?
(2marks)
(d)DifferentiateAssignmentfromfactoringasrelatesreceivables.(4marks)
(e)Distinguishbetweentradediscountandcashdiscountasusedinaccountingfor
receivables.

Answer 1

a)     Debt Investments                        168,300

                        Cash                             168,300

(b)    Cash (€160,000 x .06 x 1/2)                        4,800

                        Interest Revenue (€168,300 x.05 x1/2)                             4,208

                        Debt Investments                             592

         Interest Receivable (€160,000 x .06 x 1/3)                        3,200

                        Interest Revenue ((€168,300 - €592) x .05 x 1/3)                      2,795

                        Debt Investments                             405

         Cash ((€160,000 x 1.05) + €3,200)                 171,200

                        Gain on Sale of Investments                             697

                        Debt Investments (€168,300 - €592 - €405)                              167,303

                        Interest Receivable                             3,200

C.

The reasons for companies to sell its receivables are listed below-

Increase Cash Flow – When the company want to increase the cash inflow it would sell its receivable to generate cash.

To improve rating- When the company has cash it can make payment to its vendor on timely manner. Hence, it will result in good rating for the company.

Manpower Reduction- As the company will sell its receivable it needs less employees to handle the receivables process which will ultimately lead to cost reduction.

Mitigation of Risk- By selling the receivable company mitigates its risk as in case of receivable there is always a risk involved that the customer can make default.

D.

Assignment means using receivables as collateral to get a loan from bank or financial institute. You will get it back when you pay the loan amount.

Whereas, factoring means selling receivable to a financial institution or a company. The ownership transfers to the company buying receivable.

E.

Trade discount is provided on catalogue prices . Whereas, Cash discount is provided on invoice value.

Trade discount is provided on large orders. Cash discount is applicable on small purchases .

Trade discount is applicable on Cash & Credit Transaction. Cash Discount is available only on Cash orders.