Guys, A company sells its $130,000 accounts receivables for 95% of its value, and retains the risk of non collection. (qbank 9072 part 6) What adjustments do you make to the balance sheet to make it balance?
you add the receivables back to assets and increase liability it’s basically considered a loan that guarantees with AR
My guess would be add back 123.5 (.95*130) to both CA and CL. Unless something has to be done as a loss that is added back. Could someone also comment on what adjustments are done to the Income Statement? I thought it was nothing, but one Scwheser Q bank problem said you had to reduce EBITDA by the amount you sold. Not sure I believe that though.
well you sell them so any gain need so substracted from EBITDA and any loss added back. that would be my guess
Sale of A/r with Recourse is treated as a SHORT TERM loan These are the Adjustments: 1. Balance Sheet Increase A/R by Sale amount $130,000 Increase Current Liabilities by Sale Amount $130,000 2. Cash FLow Statement Reclassify CFO to CFF Lower CFO by Sale amount $130,000 as this was recorded previously as CFO Increase CFF by sale amount $130,000 3. Income Statement Increase EBIT as the A/R is collected from customers by the Discounted amount 0.95* 130,000 Increase Interest expense as A/R is collected from customers by the Discounted Amount 0.95*130,000
I agree with the gain - that would make sense. They were reducing NI by the whole “uncollected” amount. I just couldn’t make sense of that and q bank is always a little sketchy.
Zephyr…from what i have read…you add the A/R full amount to AR on the balance sheet…the 95% of the amount aff to the liabilities and amortize the remaining 5% as interest expense…pls. correct me if i am wrong…
Saprty419 - I am not sure - you might be right Can anyone confirm this?
And also…lower CFO by 95% value and increase CFF 95%…again…I could be wrong…for Income statement…i am not sure…
sparty is spot on schweser, but my concern is if assets increase by 130, liabilities by .95% X 130the b/s will not balance. what do we do wth the remaining 5% [ps: can I read into some one’s name ? can a person’s name be a violation of ethics? CFA is making me analyse everything on earth]
I could be wrong…but since we have been adjusting the cash flows with the respective amounts…the 5% of the amount will be included in the cash in hand in the balance sheet… think that sounds reasonable?
i dont get it… the original 100 was AR …not cash it is the .95 that was cash my thinking for now is to adjust equity with the 5% difference: Assets : 100% AR Liability : 95% Equity : 5% any one who has read or has info can assist.
Hmm…you;ve got me thinking too now…
I guess my question would be how was the original sale accounted for? Was the sale at 95% of the actual book value? In that case they would have originally booked a loss, right? And that would have to be reversed. Or was the sale at 95% of outstanding, reflecting the loss estimate – which was presumably also already reflected on the seller’s books and I think could then just be ignored.
i thought grace is right here…
what is the current liability account? Notes payable?
ok, figured it out. the loans payable account goes up by 95% and the discount on loans payable is 5%, lumped together under liabilities
What is the final, correct, answer for how this is adjusted on the Balance Sheet? This topic has been confusing me as well. Would this be the correct treatment? Original: A/R --> 130,000 Equity --> 130,000 After Sale: A/R --> 0 Cash --> 130,000 Adjusted after Sale (w/ Recourse): A/R --> 130,000 Cash --> 0 Liability --> .95 * (130,000) = 123,500 R/E --> 6,500
bump…?
i will ask my accounting professor on Tuesday (without showing him the answers)