Factoring, Assignment, and Pledging Flashcards
On November 1, 2004, Davis Co. discounted with recourse at 10%, a one-year, noninterest-bearing, $20,500 note receivable maturing on January 31, 2005.
What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2004?
A) $0
B) $20,000
C) $20,333
D) $20,500
The firm is contingent for the maturity amount, which for a noninterest-bearing note is the face value. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.
Answer = D
Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?
A) Good Neighbor Financing cannot take title to the
receivables if Milton does not repay the loan. Title
can only be taken if the receivables are factored.
B) Good Neighbor Financing will assume the
responsibility of collecting the receivables.
C) Milton will retain control of the receivables.
D) Good Neighbor Financing will take title to the
receivables, and will return title to Milton after the
loan is paid.
In a pledge arrangement, the title remains with the originator, in this case with Milton Co.
Answer = C
On April 1, Aloe, Inc. factored $80,000 of its accounts receivable without recourse. The factor retained 10% of the accounts receivable as an allowance for sales returns and charged a 5% commission on the gross amount of the factored receivables. What amount of cash did Aloe receive from the factored receivables?
A) $68,000
B) $68,400
C) $72,000
D) $76,000
The net cash received when the receivables were factored was $80,000 × .85 (100% - 10% - 5%) = $68,000.
Answer = A
