London plc enters into an agreement to assign its portfolio of 20 million trade receivables with recourse
Question:
London plc enters into an agreement to assign its portfolio of £20 million trade receivables with recourse to factor, Bath plc. The receivables have 90-day terms. Bath plc agrees to pay London plc an initial amount of £16 million in cash for the rights to the cash flows from the receivables. Once the receivables have been repaid, Bath will pay a further sum to London calculated as the balance of £4 million less interest on the £16 million initial payment until the date debtors pay (at 10%) and less any defaults (defined as any debts that remain unpaid after 120 days).
Explain how London plc should account for this transaction. Provide the rationale for your answer and specify the nature of risks that London retains or transfers to Bath.
Accounting What the Numbers Mean
ISBN: 978-0073527062
9th Edition
Authors: David H. Marshall, Wayne W. McManus, Daniel F. Viele,