I’ll give it a shot Original: A/R --> 130,000 Equity --> 130,000 After Sale: A/R --> 0 Cash --> 123,500 Equity --> 123,500 (Take a loss of 6500 on the IS) Adjusted after Sale (w/ Recourse): A/R --> 130,000 Cash --> 123,500 Liability --> 130,000 Equity --> 123,500 The whole purpose of the adjustment is to reflect the actual leverage of the firm. The equity of the firm has already taken the necessary hit for selling at a loss and no further adjustments are needed. At least thats how I see it.
I think nirjaina is right. This was a section in FSA explained the same way in Schweser last year in level 1. The balance is in the loss (since you sell accts receivable below book value)
Alright… makes sense to me.
Let’s look at this like no Gain/Loss was made on the Sale. (We will deal with the Loss later). On Sale: Reduce A/R by 130 Increase (Some) Current Liability by 130 Nirjraina seems to say Increase Cash 130 --> which I think is wrong. Now the Cash Increase would be coming because of some underlying account changing. From a Cash Flow Statement perspective reduce AR by 130 --> would increase CFO 130 Reduce some Current Liability --> would reduce CFO 130 Net balance is 0 on Cash… So how does the 130 come into the Cash Change? Once this is answered – we can proceed to deal with the adjustment – and later on with the Loss…
I believe nirjaina and myself were looking it at it like this: Starting A/R Balance is 130. A/R are sold for 95% of face. Therefore, A/R is reduced to zero, the liability associated with A/R is reduced to zero, the money received from the sale of the A/R (123,500) goes to cash and equity increases by 123,500. The loss of 6,500 is recorded on the income statement?