039 Factoring, Assignment,b& pledging

Question 1

Define “factoring”.

Answer 1

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.

Question 2

Who bears the cost of bad debts when factoring without recourse?

Answer 2

The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.

Question 3

Who bears the costs of bad debts when factoring with recourse?

Answer 3

The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.

Question 4

What is the accounting treatment when factoring with recourse, as accounted for as a loan?

Answer 4

The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.

Question 5

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

Answer 5

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.