MNL Company factored P6,000,000 of accounts receivable to a finance entity at the beginning of current year. Control was surrendered by DEF Company. The factor accepted the accounts receivable subject to recourse for nonpayment. The fair value of the recourse obligation is P100,000. The factor assessed a fee of 3% and retained a holdback equal to 5% of the accounts receivable. In addition, the factor charged 15% interest computed on a weighted average time to maturity of the accounts receivable of 54 days. Assuming that all accounts are not collected, what is the gain or (loss) on factoring? *
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
MNL Company factored P6,000,000 of
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