- This topic has 3 replies, 3 voices, and was last updated 13 years ago by
.
- Posts
See Kaplan study text , Chapter 13 Substance over form, Test your understanding 4. I am understanding the question 🙁
Can anyone explain me the three point (bullet point) in simpler words???
Please help 🙁
what was the question all about?
I have Kaplan Dec 2009 and June 2010 version. I have a funny feeling my TYU 4 is different from yours.
An entity has an outstanding receivables balance with a major customer amounting to $ 12 million and this was factored to FinanceCo on 1 September 20X7. The terms of the factoring were:
FinanceCo will pay 80% of the gross receivable outstanding account to the entity immediately.
* The Balance will be paid (less the charges below) when the debt is collected in full. Any amount of the debt outstanding after four months will be transferred back to the entity at its full book value.
* FinaceCo will charge 1.0% per month of the net amountowing from the entity at the begining of each month. FinanceCo had not collected any of the factored receivable amount by the year end.
* the entity debited the cash from FinanceCo to its bank account and removed the receivables from its accounts. It has prudently changed the difference as an administration cost.
How should this arrangement be accounted for in the financial statesments for the year ended 30 september 20X7???
I am not understanding the question , please explain me the three point (bullet point) in simpler words???
I don’t know the Kaplan text. However, you must ask yourself “Have the risks and rewards of ownership been substantially transferred when the “sale” of the receivables was recorder?”
Surely, the biggest risk, in the context of receivables, is the risk of non-collection. In the above example, if the debt is not received within 4 months, the debt is transferred back to the company. Thus, substantially the whole of the risks and rewards have NOT been transferred. It’s therefore not a “sale” of the receivables balance. But we have received cash. Therefore, it must be a loan
It’s a classic example of “substance over form” !!
- You must be logged in to reply to this topic.