Factoring, Assignment, and Pledging

Question 1

What happens in a factoring?

Answer 1

• Transferor transfers receivables to a factor as a normal part of business
• Transferor pays a fee in return for factor’s administration of receivables
• Factor often performs credit checks and collects the payments

Question 2

How is factoring without recourse accounted for?

Answer 2

• Usually as a sale
• Factor bears cost of uncollectible accounts but transferor bears cost of sales discounts, returns, and allowances as they’re considered preconditions

Question 3

When receivables are factored with recourse, what must occur? Who bears cost of bad debts and sales adjustments?

Answer 3

• Use three criteria to determine whether a loan or a sale

- Transferor

Question 4

If factoring accounted for as a sale, how is cost of factoring treated? If as a loan?

Answer 4

• Loss on sale of receivables

- Interest expense

Question 5

What’s accounting for assignment of accounts receivable? (Remember pledging is less formal than assignment)

Answer 5

-Borrower reclassifies receivables as accounts receivable assigned, a subcategory of total accounts receivable