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 ?
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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