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Question 10
On 31 March, 2011 the company factored (sold) trade receivables with a book value of $10 million to Shark Limited. The company received an immediate payment of $8·7 million and will pay Shark Limited 2% per month on any uncollected balances. Any of the factored receivables outstanding after six months will be refunded to Shark Limited. The company has derecognised the receivables and charged $1·3 million to administrative expenses. If the company had not factored these receivables it would have made an allowance of $600,000 against them. What adjustment (if any) is necessary to correct the situation outlined above?
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r’bles decrease 10,000
Loan increase 8,700
i could not understand more than this sir. Pls explain sir without DR and CR“r’bles decrease 10,000
Loan increase 8,700”is wrong!
The risks and rewards have not been transferred: “Any of the factored receivables outstanding after six months will be refunded to Shark Limited”
(I think “Shark” is the wrong name!)
If risks and rewards are not transferred, then the receivables should stay in the records of the company. The correct entry for the receipt of the $8,700 is:
Dr Cash 8,700
Dr Finance charges $1,300
Cr Loan account $10,000As for the provision:
Dr Irrecoverable debts account $600
Cr Provision for irrecoverable debts account $600
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