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march june 2017
Alternatively, the factor would advance 20% of the $40 million receivables sold. Further amounts will become payable to Diamond but are subject to an imputed interest charge so that Diamond receives progressively less of the remaining balance the longer it takes the factor to recover the funds. The factor has full recourse to Diamond for a six-month period after which Diamond has no further obligations and has no rights to receive any further payments from the factor.
in the answer scheme, i dont understand this line..
‘the recv and liability balances would gradually be reduced as the factor recovered the cash from Diamond’s customers which would be adjusted for imputed interest and expensed in profit or loss.’
could you please explain further, if possible, with numbers and double entry…. why liability reduces?
If there is recourse the selling company will still have a receivable in their books, plus a liability for the funds advanced by the factor.
When the selling company’s customers pay the factor, the selling company will be advised. At that stage they can Dr Liability Cr Receivable – they won’t have to reimburse the factor as the factor now has his / her money.
I see, okiee got it. How about the profit or loss part? Is it for the finance cost incurred?
There will be a finance cost – I would think of it as a separate transaction (profit down, cash down), although in practice the factor may settle on a net basis (I owe you 10 but you owe me 1 – so here is 9).