Factoring, Assignment, and Pledging

In a specific assignment of receivables...

A/R assigned are identified by placing them in an A/R assigned account. A finance charge is assessed on assignment transactions that are borrowings.

EX: Factoring 20k A/R w/o Recourse. Factor Charge = 5% Sales Returns = 3%

Cash 18,400 Rec from Factor 600 Loss on Sale 1,000 A/R 20,000 Sales Ret & Allowances 600 Rec from Factor 600

EX: Factoring w/ Recourse- LOAN Factor 20k Factor Charge = 2% Esti Liab = 1k 3 Criteria = NOT Met

Cash 19,600 Disc on Factor Liab 400 Factor Liab 20,000 Allowance for Doubtful Accts 1,000 A/R 1,000

EX: Factoring w/ Recourse- SALE Factor 20k Factor Charge = 2% Esti Liab = 1k 3 Criteria = Met

Cash 19,600 Loss on Sale 1,400 A/R 20,000 Recourse Liab 1,000

Factoring w/ Recourse

Determine if Sale or Loan (3 Criteria) -If Sale, similar to Factoring w/o Recourse except must estimate and record a recourse liability -Transferor responsible for cost of Bad Debt and Sales Adjustments

(T/F) The balance in "factor's holdback" (due from factor) is reported as an expense of the period

F "Factor's Holdback" accounts for the proceeds retained by the factor to cover estimated sales discounts, sales returns, and sales allowances. When all amounts have been collected by the factor, the balance in factor's margin is returned to the seller. Therefore, this account is a receivable reported as a CA on the B/S.

(T/F) Factors are banks/finance companies that purchase receivables for a fee and then collect the remittances directly from the selling company.

F Once a company sells receivables to a factor it normally has no further involvement with the receivables. The factor usually collects the remittances directly from the customer.

(T/F) A transfer of receivables with recourse may be accounted for as a sale, provided the transferee can require the transferor to repurchase the receivables.

F Transfers of receivables in which the transferee can require the transferor to repurcahse the receivables may not be considered a sale.

(T/F) In a specific assignment of receivables, collections on the assigned accounts are generally remitted to the assignor.

T A specific assignment of receivables bestows more formal rights upon the assignee (lender) in that the A/R do not simply collateralize the loan, but collections on the assigned accounts are actually remitted to the assignor who remits them to the assignee (lender).

(T/F) In a transfer of receivables with recourse accounted for as a borrowing, the difference between the receivables and the total of the factor's holdback + the proceeds is a financing cost that should be amortized to interest expense over the term of the receivables.

T The difference between the amount of receivables sold to a factor in a borrowing transaction and the total of the factor's holdback + the proceeds is recorded in a "Discount on Transferred A/R" or interest expense account. This account represents interest cost and should be recognized over the term of the receivables. If interest expense is debited, an adjusting entry to defer some of the interest as "Discount" would be required if some of the discount pertains to a later period.

In a pledging arrangement, the title...

remains with the originator

A loss is recognized on a transaction when...

there is a sale

Assignment of A/R

-A/R as collateral for a loan -Collateral moved to "A/R Assigned" account -As cash is received, remitted in payment for the loan -Loan & Rec are not offset on the borrower's B/S -When the loan is repaid, the A/R Assigned is returned to ordinary A/R

Pledging of A/R

-Less formal than Assignment -Not collateral, Not reclassified -C/F from the rec are used to pay the loan -Footnote disclosure is required

Factoring w/o Recourse

-Usually a Sale, b/c the factor has no recourse against the transferor -If there is a default, the Transferee bears the cost of uncollectable -Transferor bears the cost of sales adjustments (sales discounts and returns & allowances) b/c they are considered preconditions