Criteria for Sales of Receivables

Question 1

Need to know:

Answer 1

• Terminology
• Forms of transfer of accounts receivable
• Calculate gains and losses
• Tested at a high level

Question 2

Why do companies sale AR

Answer 2

Eliminate the need of a collection department
Accelerate the receipt of cash
Matching cash receipts with operating cycle

Question 3

Who are the parties involved?

Answer 3

The Transferor
The transferre:
The customer:

Question 4

Criteria for Transfer to Be a Sale:

Answer 4

1) The asset are isolated from the transferor (meaning they no longer have control over the assets)
2) The transferee is free to pledge or exchange the assets
3) There is no agreement in which the transferor will be required to repurchase the assets

Question 5

If you do not meet the three criteria then you have a_______________. And how do you record it?

Answer 5

If you do not meet the three criteria you have a SECURED BORROWING. The bank will give you cash but you do not relinquish control of the assets.

ENTRY:
A Liability
Interest Expense

Question 6

IF you meet the three criteria, you next have to ask this question.

Answer 6

Is there continuing involvement with respect to collection or satisfaction of the product? If yes, then you record the sale:

1) Remove or reclassify asset
2) Recognize asset received and liabilities incurred
3) Record gain or loss

If NO to the question above:

1) Remove sale
2) Record gain or loss

Question 7

How do you account for the sale if you meet the three criteria and do not have continuing involvement?

Answer 7

Cash (DB)
A/R (CR)
Gain or Loss (DB/CR)

Question 8

If you do not meet the three criteria, what is the journal entry?

Answer 8

CASH (DB) 
NOTE PAYABLE (CR)