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Beth sold some trade receivables which arose during November 2007 to a factoring company on 30 November
2007. The trade receivables sold are unlikely to default in payment based on past experience but they are long
dated with payment not due until 1 June 2008. Beth has given the factor a guarantee that it will reimburse any
amounts not received by the factor. Beth received $45 million from the factor being 90% of the trade receivables
sold. The trade receivables are not included in the balance sheet of Beth and the balance not received from the
factor (10% of the trade receivables factored) of $5 million has been written off against retained earningsPlease help me understand the above adjustment….!!!
This is how I answered yesterday the same question on Ask ACCA Tutor!
Is there a problem with the explanation?
“Risks and rewards have not been passed over to the factor so the receivable has not in fact been sold. It is still a receivable by Beth and should be shown as such
The $5m money less 10% is a loan from the factor and should be recorded as Dr $4.5m Cash, Dr $500,000 Finance Charges, Cr $5m Loan account”
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