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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….!!!
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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