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“Robby held a portfolio of trade receivables with a carrying amount of $4 million at 31 May 2012. At that date, the entity entered into a factoring agreement with a bank, whereby it transfers the receivables in exchange for
$3·6 million in cash. Robby has agreed to reimburse the factor for any shortfall between the amount collected and $3·6 million. Once the receivables have been collected, any amounts above $3·6 million, less interest on
this amount, will be repaid to Robby. Robby has derecognised the receivables and charged $0·4 million as a loss to profit and loss.”Examiner’s treatment on this is:-
Dr trade receivables $ 4 mil
Cr secured borrowings $ 3.6 mil
Cr retained earnings $ 0.4 milWhat is the logic of the above treatment ?
Please assist me. Thanks…!
hi, the treatment is because Robby has made the wrong treatment by derecognising the receivables.
the risks and rewards of ownership have not been transferred to the bank, as Robby promised to pay the bank for any shortfall.
So Robby cannot derecognise the receivables;that is why Dr trade receivables, and Cr the 3.6 as a loan.
(Correct me if am wrong).
So i understand, that if I did not promise to pay any shortfall then Robby’s treatment would be correct and no reversal would be required?
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