Page 185 - SBR Integrated Workbook STUDENT S18-J19

Financial instruments

Example 11

Debt factoring

Mutton held a portfolio of trade receivables with a carrying amount of $5
million at 31 December 20X3. At that date, the entity entered into a factoring
agreement with a bank, whereby it transferred the receivables in exchange for
$4 million in cash.

Further amounts become payable to Mutton but are subject to an interest
charge so that Mutton receives less of the remaining balance the longer it
takes the factor to recover the funds. Mutton has also agreed to reimburse the
factor for any shortfall between the amount collected and $4 million.

Mutton has posted the following accounting entry:

Dr Cash $4m

Dr Profit or loss $1m

Cr Receivables $5m

In respect of the financial statements of Mutton for the year ended 31
December 20X3, discuss whether the above accounting treatment is
correct.

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