FAR 10.02 - SALES AND PLEDGING OF RECEIVABLES Flashcards
FAR 10.02 - SALES AND PLEDGING OF RECEIVABLES
Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices.
Which of the following would alter the timing of Red’s cash flows for the $3 million in receivables already
recorded on its books?
Demand payment from customers before due date.
Discount the receivables outstanding.
Factor the receivables outstanding.
Change the due date of the invoice.
Factor the receivables outstanding.
EXPLANATION:
Factoring is a financial transaction in which a business sells its accounts receivable for cash to a third party (called a factor) at a discount. It is a technique allows business to covert accounts receivable to generate cash more quickly.
FAR 10.02 - SALES AND PLEDGING OF RECEIVABLES
Choose the correct statement(s) below regarding the transfer of financial
assets such as receivables:
I. In a transfer of receivables without recourse, the transferee obtains the right to compensation from the transferor for customer accounts that prove to be uncollectible.
II. In a transfer which qualifies as a secured borrowing, the transferor will record a liability for the amount borrowed.
III. Under otherwise identical conditions, a transferor will generally pay a higher commission percentage on a receivable sold with recourse versus one sold without recourse.
III only.
I and III only
I, II, and III
II only
II only- In a transfer which qualifies as a secured borrowing, the transferor will record a liability for the amount borrowed.
EXPLANATION:
A transfer of receivables does not always result in the transferee receiving substantially all of the rights and risks of
ownership, in which case the transaction is recognized as a secured borrowing.
When this is the case, the receivables remain on the financial statements of the transferor and the proceeds are considered a liability.
A transfer without recourse indicates that the transferee bears the risk of collection and has no recourse to the transferor if some or all of the receivables prove uncollectible.
Due to the higher risk, a transfer without recourse generally results in the payment of a higher commission than a transfer with recourse, under which the transferor retains the risk of collectibility.
FAR 10.02 - SALES AND PLEDGING OF RECEIVABLES
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?
Milton will retain control of the receivables.
Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.
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.
Good Neighbor Financing will assume the responsibility of collecting the receivables.
Milton will retain control of the receivables.
EXPLANATION:
“Pledging” accounts receivable means that Milton Co. has used its accounts receivable as collateral to secure a loan, and that Milton still retains control of the receivables.
FAR 10.02 - SALES AND PLEDGING OF RECEIVABLES
Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction,
which is best described as a…
Loan from Ross collateralized by Gar’s accounts receivable.
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar.
Loan from Ross to be repaid by the proceeds from Gar’s accounts receivable.
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross.
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross.
EXPLANATION:
Since Gar factored its receivables without recourse, Ross will have to collect the receivables to the extent possible and
will bear the risk of uncollectible accounts.
Gar will treat the transaction as a sale, recognizing a gain or loss equal to the
difference between the carrying value of the factored receivables and the proceeds from the transaction.
