Sale of A/R

CFA Level II
#1

Dear;

why increase current liability ?

Thanks

A firm has booked as a sale, the transfer of $100 million in short-term accounts receivable to Public Finance Co., subject to recourse. The notes to the financial statements disclose that as of the end of the fiscal year, $80 million remained uncollected. In order to reflect this on the balance sheet, which of the following adjustments must be made?

A) Decrease cash and increase accounts receivable. B) Decrease retained earnings and increase accounts receivable. C) Increase accounts receivable and increase current liabilities.

Your answer: C was correct!

Since the accounts receivable were sold with recourse, the risk on uncollected accounts remains with the company.

#2

Becuase it was done with recourse so it is treated as a collateralized bororowing.

#3

Can you please journalize these transactions.

thanks

#4

what does www.google.com do for you, passcfaforsure…

#5

Dr AR 80MM

Cr Current Liabilites 80MM

#6

Originally A/R in the balance sheet then the sale happened. how to record this transaction? please journalize all the transaction when the sale happend

thanks

#7

…

#8

I would suggest that you go back and read the CFAI material covering this. Schweser also does a good job explaining it. I am happy to help but I don’t know how to explain it any better. Maybe someone else can give it a go.

#9

when you sell your A/R

you reduce AR, receive Cash.

Both transactions occur on the A side of A=L+E (A up, A Down). No effect.

now you are reversing the transaction.

so you bring back AR on the books.

but you paid cash to someone - so you are incurring a debt when you receive the cash back. so it goes back on your book as a liability.

A = L + E

is balanced as

A up, L Up.

you would be paying some sort of “interest” to the person who you took the loan from.

#10

I’m still not certain that this is a real person.

#11

don’t follow you this point "but you paid cash to someone - so you are incurring a debt when you receive the cash back. so it goes back on your book as a liability."s pay cash to who? and why get cash back?

thanks

#12

you sold the AR to someone. and received cash right. --> when you sold.

Now when you get it back with recourse…

you received the AR back. That person had an opportunity cost for the cash he gave you didn’t he…

that is why when it comes back to your books - it becomes a loan - and there is an imputed interest cost. This is how Finance deals with it. And you put it back on your books as a liability and take it off when that imputed interest cost is paid.

#13

I got it.

thank you so much

#14

Interesting, thks…

But did he pass it… For sure?