Question

When accounts receivable are employed to get cash?

A.The entity that receives the cash typically prefers that the transaction be recorded as a sale.

B.How the entity that provides the cash accounts for the transactions governs whether the entity that receives the cash accounts for it is as a sale or as a loan.

C.Footnote disclosures of the associated contingent liability are required when accounts receivable are assigned.

D.Relative to loan treatment, sale treatment always results in a higher current ratio.

Answer 1

Accounts receivable employed to get cash means discounting the Accounts receivable with the bank to get cash.

Journal entry will be-

Cash	xxxx
Discount on accounts receivable discounting	xxx
Accounts receivable		xxxx

* The entity that receives the cash doesnot account for it as a sale ,rather it accounts such transaction as a bill discounting with the bank.

* The entity that privides the cash by taking the accounts receivable doesnot govern how the entity that receives the cash accounts it.

* When accounts receivable are assigned for cash,generally the entity that is buying the accounts receivable bears all the risk relating to non recoverability of accoutns receivable. Hence no contingent liability to be disclosed by the entity assigning the accounts receivable.

*Relative to getting the loan , sale of accounts receivable or assignment of accounts recivable against cash always results in higher current ratio. Because in case of taking loan , it will affect both the current asset and current liability and hence the curremt ratio will decrease.

But incase of assignment of accounts receivable, it will affect the current asset only to the extent of discount on accounts receivable,hence relative decrease in current ratio is less.

Option-D is correct.