(multiball choice) 1. DeSilva Corporation had accounts receivable of $250,000 at

Question

(multiball choice)

1. DeSilva Corporation had accounts receivable of $250,000 at 1/1. The only transactions affecting accounts receivable were sales of $1,100,000 and cash collections of $1,250,000. The Accounts Receivable Turnover is:

6.3

4.4

5.0

11.0

2.

Oliver Inc factors $2,000,000 of its accounts receivables with recourse for a finance charge of 2%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Oliver estimates the fair value of the recourse liability at $100,000. What would be recorded as a gain (loss) on the transfer of receivables?

Gain of $40,000

Gain of $340,000

Loss of $140,000

Loss of $100,000

6.3

4.4

5.0

11.0

Explanation / Answer

                                        Net Credit Sales______________________    

(Beginning Accounts Receivable + Ending Accounts receivable)/2

Net credit sales are $ 1,100,000. Beginning Accounts Receivable is $250,000. We need to calculate ending accounts receivable.

Ending Accounts receivable = Beginning Accounts Receivable + Net credit sales - cash collections

= $250,000 + $1,100,000 - $1,250,000 = $100,000

Now the Accounts receivable turnover ratio is

1,100,000_______

($250,000 + $100,000)/2

= 1,100,000

    175,000

=6.30 (Rounded off to 1 decimal)

Hence the answer is A. 6.3

2. Factoring is an agreement where a Factoring company agrees to purchase accounts receivable of a company. The factoring company later will collect that amount from the customers of the company. This is one type of short term financing or improving their working capital. Let us not discuss about pros and cons of factoring here.

Factoring with Recourse means, when there is any accounts receivable uncollectible, that will be borne back by the company. A part of the risk will be with the company that sells the accounts receivable.

Here Oliver Inc. factors its accounts receivable of $2,000,000 with recourse. The factoring company retains 10% of the accounts receivable to cover this recourse liability. That means factoring company is retaining $200,000 (10% of $2,000,000) for possible adjustments. But Oliver Inc. estimates the fair value of recourse liability is only $100,000. As the factoring company is retaining more than the fair value the difference will be a loss. Hence the loss to should be recorded on transfer of accounts receivable is $200,000 - $100,000 = $100,000

Answer is D Loss of $100,000

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