Disposition of Notes/accounts

7 important questions on Disposition of Notes/accounts

Accounts and Notes Receivable: Disposition

-Common Financing Options:WHen you allow Accounts/Notes Receivable, the manufacturing process  takes time and requires significant upfront capital investment
-How to solve this problem:
  1. Find a rich relative or friend to give you cash outright.
  2. Sell your receivables to a 3rd party
  3. Take out a loan

Disposition- Sales of Receivables

-You must find someone to buy your receivables
  • Factors: Companies that buy receivables for a fee
    • & then collect the payments directly from customers.

Sales of Receivables: Sale without Recourse; Definition

-Purchaser assumes risk of collection(transfer of control)
-Transfer is outright sale of receivable (transfer of title)
-Seller records loss on sale
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Sale of Receivables: Sale with Recourse; Definition

-Seller guarntees payment to purchaser if any of A/R sold becomes uncollectible
  • i.e., recognize recourse liability (JE) related to possible losses on uncollectible accounts

How to find loss on sale of receivables if not given

How to find the loss on sale of receivables

How the JE for buyer looks with or without recourse

DR A/R
CR Due to customer (Receivables from factor)
CR Interest Revenue (Loss on sale of receivable - Recourse Liability)
CR Cash(Plug)

Accounts Receivable Turnover

-To assess the liquidity of receivables
  • Measures the # of times, on average, a company collects receivables during the period.
-Formula: Net sales/ Avg. Net A/R= A/R Turnover

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