You add the sale back to Current A and Current L, but you don’t need to subtract the sale from revenues correct?
when you bring back receivables- you’re right, add back to current A and L. i don’t think you subtract sale from revenues, but you should reclassify the sale- take it out of operating cash flow and add it to financing cash flow (so it feels more like you just borrowed money instead of it’s actually yours already).
when you sale with recourse the entries you are not only collecting the cash on to pass on to the buyer but you also bear the risk of any potentail bad debts. so this is seen as borrowing money from the buyer of your debts Adjustments to reverse increase liabilities increase Accounts receivables
I just wanted to continue with this topic a little: So when you securitize receivables with recourse, you will make adjustments as follows A/R - increases by the full amount of receivables sold create a N/P for the amount of sale if you made the sale with a discount these two might be different numbers Adjust CFO down by the amount of sale, and increase CFF by the same amount As receivables are collected, if the sale was made at a discount, discount is amortized as interest expense Anything I am missing?
I think this is the process. 1. Increase original Amount to Assets and Liabilities. 2. Add back interest expense to Income Statement 3. Remove Receiv sold from Cash Flow from Ops and add to CFF.
where does interest expense come from?
Here is an example I found from Q-Bank…The company securitized $130,000 worth for receivables for $123,500…They seem to suggest adding the discount back as interest expense only as receivables are collected. Which of the following statements regarding the adjustments that Schmidt should make to Landesign’s financial statements for its sale of receivables is most accurate? A) $123,500 should be added to cash flow from financing, and $123,500 should be subtracted from cash flow from operations. B) Accounts receivable should be increased by $123,500, cash should be decreased by $123,500, and a loss of $6500 should be recognized on the income statement. C) Accounts receivable should be increased by $123,500, loans payable should be increased by $123,500, and a loss of $6,500 should be recognized on the income statement. Your answer: A was correct! When receivables are sold with recourse, the risk of noncollection of sold receivable is retained by Landesign. Therefore, Schmidt should make two adjustments: (1) The sale of receivables should be reclassified as CFF instead of CFO, meaning that $123,500 should be added to cash flow from financing, and $123,500 should be subtracted from cash flow from operations. (2) The full amount of the receivables, $130,000, should be added to accounts receivable, and a liability called loan payable of $123,500 should be added to the liabilities side of the balance sheet. Note that no adjustments to income are made at this time. As the receivables are collected, the 5% discount ($6,500) is amortized as interest expense. (Study Session 7, LOS 27.b)
2 situations. (I should have been more specific on #2) You can sell your receivables for more than A/R. (Interest rates have changed and they are now worth more than what A/R has them listed as.) In income statement you would have originally posted a gain. You can sell your receivables for less. There you would post a loss in the income statement. When making the correct FSA adjustments have to make adjustments as noted 1-3 to reverse out the Securitization with recourse. That would include making changes to IS if they were sold for more or less than A/R amount.
Good example ya_ne
Thank GMofDen, just as I started to ponder WHY there would be a gain or loss anyway, you provided the interest rates explanation!
ya_ne_knut Wrote: ------------------------------------------------------- > Here is an example I found from Q-Bank…The > company securitized $130,000 worth for receivables > for $123,500…They seem to suggest adding the > discount back as interest expense only as > receivables are collected. > > > > Which of the following statements regarding the > adjustments that Schmidt should make to > Landesign’s financial statements for its sale of > receivables is most accurate? > > A) $123,500 should be added to cash flow from > financing, and $123,500 should be subtracted from > cash flow from operations. > B) Accounts receivable should be increased by > $123,500, cash should be decreased by $123,500, > and a loss of $6500 should be recognized on the > income statement. > C) Accounts receivable should be increased by > $123,500, loans payable should be increased by > $123,500, and a loss of $6,500 should be > recognized on the income statement. > Your answer: A was correct! > > When receivables are sold with recourse, the risk > of noncollection of sold receivable is retained by > Landesign. Therefore, Schmidt should make two > adjustments: (1) The sale of receivables should be > reclassified as CFF instead of CFO, meaning that > $123,500 should be added to cash flow from > financing, and $123,500 should be subtracted from > cash flow from operations. (2) The full amount of > the receivables, $130,000, should be added to > accounts receivable, and a liability called loan > payable of $123,500 should be added to the > liabilities side of the balance sheet. Note that > no adjustments to income are made at this time. As > the receivables are collected, the 5% discount > ($6,500) is amortized as interest expense. (Study > Session 7, LOS 27.b) Just search function’d this message. I understand that in adjusting back securitization of A/R A/R increases $130,000 to original amount Liabilities increase by $123,500 to reflect the loan payable created from securitization My question: Where does the $6,500 (originally a loss under the original securitization transaction, I believe) come from to balance out A=L+E? Much appreciated.
it was a loss, went into income statement at the time of the transaction, already in Net Income, hence in the E part of the transaction when it happened. now this 123.5 adjustment is an analyst adjustment. so A UP, L Up. no more…
cpk123 Wrote: ------------------------------------------------------- > it was a loss, went into income statement at the > time of the transaction, already in Net Income, > hence in the E part of the transaction when it > happened. > > now this 123.5 adjustment is an analyst > adjustment. > > so A UP, L Up. > > no more… Thanks for your reply CP, just a quick clarification: I understand we initially took a loss when we securitized, I’m just wondering how we balance out the analyst adjustment. Before adjustment we took a loss, got rid of our A/R and increased our cash by 123,500 (the securitization proceeds) Analyst adjustment calls for increasing our A/R by the original amount and increasing liabilities by our cash proceeds. This produces a $6,500 imbalance on the asset side being greater than the L+SE side. I guess my real question is, how does the L+SE side get balanced? Is a gain in SE recorded? Appreciate your help.