Accounts Receivable Problems

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Question 1

company takes $400,000 of its accounts receivable to the local bank and leaves all of the
records and information there. The company walks out with $340,000 in cash. The
company's accountant is trying to determine whether the receivables have been sold and a
$60,000 loss should be reported or whether a $340,000 loan has been granted by the bank
and the receivables are serving as security. Which of the following statements is true?

A If the receivables can be repurchased by the company, the transaction is viewed as

a loan.
B If the bank can pledge the receivables to a third party, the transaction is viewed as
a loan.
C If the receivables are completely separate from the company, the transaction is
viewed as a loan.
D If the company declares bankruptcy and its creditors are able to recover the
receivables, the transaction cannot be viewed as a loan.

The correct answer was A.

When receivables are transferred to another party in this way, the question as to whether
a sale has occurred depends on whether the original owner has retained control over those
receivables. If the receivables can be repurchased, the company still has some control
over them so that the transaction is deemed to be a loan not a sale. However, if the buyer
can pledge or sell the receivables, those receivables are completely isolated from the
original company, and the receivables are safe from the creditors of the original
company, then the receivables are completely in the control of the buyer and a sale has
occurred.

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Question 2

A company sells $200,000 of its accounts receivable to a bank for $176,000 without
recourse. The company believes that the bank will only be able to collect between
$170,000 and $180,000 from the receivables but no number within that range is more
likely than the rest. What amount of loss should the company recognize in connection
with this transaction?
 A $20,000
B $24,000
C $25,000
D $30,000

The correct answer was B.

Because the receivables were sold without recourse, the amount that the bank eventually
collects has no impact on the company making the sale. The bank is not able to come
back to the seller for any amount of a refund. The company sold $200,000 of its
receivables for $176,000; that is a loss of $24,000.

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Question 3

A company sells $300,000 of its accounts receivable to a bank for $260,000 with
recourse. The company must provide a refund to the bank for any amount that the bank
fails to collect below $250,000. The company has evaluated the receivables and believes
the bank should be able to collect $244,000. What amount of loss should the company
recognize on the date of the original sale?

A $40,000
B $46,000
C $50,000
D $56,000

The correct answer was B.

The company making this sale must recognize an estimated liability for $6,000. That is
the expected amount that will have to be refunded to the bank. That is the estimated
shortfall below the minimum collection level. The company removes its $300,000 in
receivables and reports the $260,000 cash that is collected. In addition, the $6,000
liability must be recorded, leaving a loss of $46,000 on the sale of the receivables.

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Question 4

The Ambrose Company holds $500,000 in accounts receivable which it sells to the First
National Bank. The sale is for $450,000. However, Ambrose only collects $400,000 at
the present time. The remainder will be paid based on the amount actually collected. If
the bank collects $470,000 or more, Ambrose will receive the entire residual amount. If
the bank collects less then $470,000, some (or all) of the residual will be retained to
compensate the bank. Ambrose believes that the bank will be able to collect $451,000.
What is the amount of loss that Anderson should recognize on this sale?

A $18,000
B $49,000
C $50,000
D $69,000

The correct answer was D.

Ambrose has already received $400,000. Because collections are expected to be $19,000
short of $470,000 ($470,000 minus $451,000), Ambrose will not receive the entire
$50,000 held by the bank but only $31,000 ($50,000 less $19,000). Thus, Ambrose
expects to collect a total of $431,000 for its $500,000 in receivables leaving a $69,000
loss.