Q1 Jun 2012

This topic contains 1 reply, has 2 voices, and was last updated by Avatar of MikeLittle MikeLittle 1 year, 9 months ago. This post has been viewed 43 times

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  • Avatar of stacie395
    • Topics: 9
    • Replies: 10

    Hi, stacie here. I am quite confused with the following ;-

    “Robby held a portfolio of trade receivables with a carrying amount of $4 mil at 31 May 2012. At that date, the entity entered into a factoring agreement with a bank, whereby it transfers the receivables in exchange for $ 3.6 mil in cash. Robby has agreed to reimburse the factor for any shortfall between the amount collected and $ 3.6 mil. Once the receivables have been collected, any amounts above $ 3.6 mil, less interest on this amount, will be repaid to Robby. Robby has derecognised the receivables and charged $ 0.4 mil as a loss to profit or loss.”

    Examiner’s treatment for the above :-
    Dr trade receivables $ 4 mil
    Cr secured borrowings $ 3.6 mil
    Cr retained earnings $ 0.4 mil

    What is the logic for the above treatment ?

    Avatar of MikeLittle
    • Topics: 1
    • Replies: 7016

    It’s undoing the treatment which has been applied. Risks and rewards have NOT been transferred so the Receivables remain the property of Robby and the “sale value” is in effect a loan

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