FAR 3 - M2 TRADE RECEIVABLES

Question 1

Factoring receivables-meaning

Answer 1

Sales of AR to 3rd party

Risk of uncollectible accts transferred to 3rd party

Question 2

How can you convert receivables to cash

Answer 2

Factor the receivables

sell the receivables

Question 3

Discounting the note

Answer 3

Discount it by the effective interest rate x # of mos held

Face of note 500,000 (held for 6 mos)
Int 8%/ yr 40,000
——————
Total 540,000
eff rate 10%- disc by bank
10% *1/2 (6 mos) 5%
————————-
discount (27,000)
total note 540,000
—————————
Total recd from bank 513,000