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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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When the accounts receivable of a company are sold outright to a company that normally buys accounts receivable of other companies without recourse, the accounts receivable have been:

  1. a. factored
  2. b. assigned
  3. c. pledged
  4. d. collateralized

To determine

Identify the term used, if “the accounts receivable of a company are sold outright to a company that normally buys accounts receivable of other companies without recourse”.

Explanation

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Justification for the incorrect option of b:

Assignment of accounts receivable is the lending agreement between the lender and borrower whereby, the borrower assigns accounts receivable to the lending institution. Therefore, it is an incorrect option.

Justification for the incorrect options of c:

Accounts receivable pledging happens, if a company uses its accounts receivable as “collateral for a loan”. Therefore, it is the incorrect option.

Justification for the incorrect option of d:

Portion of accounts receivable is pledged as “collateral” to be eligible for a loan or line of credit...

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