Under which of the following arrangements will a company transferring receivables record a liability on the...

Under which of the following arrangements will a company transferring receivables record a liability on the date of entering into the arrangement?

a) Sale without Recourse

b) Sale with Recourse

c) Secured Borrowing

a and b

b and c

Solutions

Expert Solution

Answer :- B and C

Justification:

A. Sale without recourse :- Under this tranfer, Transferror would tranfer all the risk to factor. Here, factor takes on all the risk of uncollectable receivables. Tranferror has no liability with respect to uncollectable receivables. Therefore, no liability can required to be record in the books of Transferror.

Generally, entry would be

Debit - Cash/ Bank Account and Interest expense

Credit - Trade receivables

B. Sale with recourse : Under this tranfer, Transferror would not tranfer all the risk to factor. Here, factor can demand money back from the transferror with respect to uncollectable receivables. Tranferror has liability with respect to uncollectable receivables. Therefore, liability can required to be record in the books of Transferror at the time of arrangement.

Generally, entry would be

Debit - Cash/ Bank account and Hold back amount

Credit - Short term debt

C. Secured Borrowing : Under Secured Borrowing, company has obtained loan and pledging the trade receivables. Therefore, it will required to be record the libaility as on arrangement date.

ekkarill92 answered 1 year ago

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