INTAC - CHAPTER 8

Question 1

Why would an entity factor accounts receivable?

a. To improve the quality of credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements

Answer 1

c. To accelerate access to amount collected

Question 2

Which of the following is a method to generate cash from accounts receivable?

a. Assignment
b. Factoring
c. Assignment and factoring
d. Assignment, factoring and discounting

Answer 2

c. Assignment and factoring

Question 3

The practice of realizing cash from accounts receivable prior to maturity date is widespread. Which term is not associated with this practice?

a. Hypothecation
b. Factoring
c. Defalcation
d. Pledging

Answer 3

c. Defalcation

Question 4

When the accounts receivable are sold outright, the accounts receivable have been

a. Pledged
b. Assigned
c. Factored
d. Collateralized

Answer 4

c. Factored

Question 5

Which of the following is used to account for probable sales discounts, sales returns and sales allowances in a factoring arrangement?

a. Factor holdback
b. Recourse liability
c. Both factor holdback and recourse liability
d. Neither factor holdback nor recourse liability

Answer 5

a. Factor holdback

Question 6

When an entity factored accounts receivable without recourse with a bank, the transaction is best described as

a. Bank loan collateralized by the accounts receivable.

b. Bank loan to be repaid by the proceeds from the accounts receivable.

c. Sale of the accounts receivable to the bank, with risk of uncollectible accounts retained by the entity.

d. Sale of the accounts receivable to the bank, with the risk of uncollectible accounts transferred to the bank.

Answer 6

d. Sale of the accounts receivable to the bank, with the risk of uncollectible accounts transferred to the bank.

Question 7

Which statement is true when accounts receivable are factored without recourse?

a. The transaction may be accounted for either as secured borrowing or sale.

b. The accounts receivable are used as collateral.

c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the accounts receivable.

d. The financing cost should be recognized ratably over the collection period.

Answer 7

c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the accounts receivable.

Question 8

All but one of the following are required before a transfer of accounts receivable can be recorded as a sale.

a. The transferred accounts receivable are beyond the reach of the transferor and the creditors.

b. The transferor has not kept effective control through a repurchase agreement.

c. The transferor maintains continuing involvement.

d. The transferee can pledge the accounts receivable.

Answer 8

c. The transferor maintains continuing involvement.

Question 9

If financial assets are exchanged for cash but the transfer does not meet the criteria for a sale, the transaction should be accounted for as

a. Secured borrowing
b. Pledge of collateral
c. Both secured borrowing and pledge of collateral
d. Neither secured borrowing nor pledge of collateral

Answer 9

c. Both secured borrowing and pledge of collateral