B. TRADE RECEIVABLES - Factoring

Question 1

_{B. TRADE RECEIVABLES}

Selling or Factoring Receivables: meaning?

Answer 1

Many businesses will use their receivables as an immediate source of cash by “selling” or “factoring” the receivables.

Basically, the company is selling their receivables at a discount in exchange for cash,

but depending on the specifics of the transaction, it will either be considered a loan or a sale of the receivables.

Question 2

_{B. TRADE RECEIVABLES}

Selling or Factoring Receivables:

Is it a loan or a sale?

Answer 2

There are 3 criteria for determining if a transfer of receivables is considered a loan or a sale.

If all 3 are met, it is a sale. If any are not met, then it’s considered a loan.

1. The transferred receivables are not accessible by the company or its creditors (control is given up)
2. The transferee has the right to sell or pledge the receivables
3. There’s no agreement that lets the company keep control of the receivables

Question 3

_{B. TRADE RECEIVABLES}

AR Secured Borrowing

Answer 3

If the receivables are transferred but _the transferee doesn’t have the right to sell the receivables and the transferor keeps contro_l, then the transaction is “secured borrowing”.

They are just using their receivables as collateral and receiving a loan.

To record a secured borrowing transaction:

Cash XX

Note payable XX

Question 4

_{B. TRADE RECEIVABLES}

Factoring Receivables - without recourse

Answer 4

In this transaction, the company assigns their receivables to a factor (usually a bank) for a fee and receives cash in return.

This can be done with recourse, or without recourse.

Without recourse is considered a sale of the receivables,
because once transferred the receivables are up to the factor to deal with and collect on.

Here’s the general journal entry for factoring receivables without recourse:

Cash 90

Loss on sale of receivables 10

Accounts receivable 100

Question 5

_{B. TRADE RECEIVABLES}

Factoring Receivables - with recourse

Answer 5

If the transaction is with recourse to the company, it depends on the specifics whether it’s treated as a sale or borrowing.

The company might be required to make payments to the factor or possibly buy back receivables.

If the transaction meets the requirements of a sale but there is recourse, then a “recourse liability” must be reflected in the books.

Here’s the general journal entry for factoring receivables with recourse:

Cash 90

Loss on sale of receivables 15

Accounts receivable 100

Recourse liability 5