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Frog entered into a factoring arrangement with a bank on 1 June 20X6 Receivables of $15 million have been sold, with a cash advance of $13 million being paid to Frog
The balance will be paid to Frog when customers pay the bank, subject to a 2% finance charge per month of the net amount owing from customers at the start of the month
Any amounts not collected after four months will be returned by the bank to Frog.
Which of the following represents the correct Journal to record the transaction on 1 June 20X6 ?
a) Debit Bank $15m, Credit Receivables $15m
b) Debit Bank $13m Credit Receivables $13m
c) Debit Bank $13m Debit Administrative expenses $2m Credit Receivables $15m
d) Debit Bank $13m. Credit Loan $13m
Hello respected sir!!
My confusion about question mention above is that there is mentioning in last line that “Any amounts not collected after four months will be returned by the bank to Frog” so I think it means that this is factoring without recourse and I choose B but CORRECT ANSWER IS D.
So how could we identify that it is factoring WITH recourse ??
Please help me in this question.
Hi,
Answer D is the correct answer as the factor will pay back the amounts they collect on behalf of Frog but it amounts are not collected then the bank returns the receivables to Frog, hence the agreement is with recourse. I think you may be thinking that the bank returns any outstanding cash when it is the receivables balance they transfer back and so Frog cannot remove the receivable as they still have the risks and rewards attached to the balance.
Thanks
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