To accelerate cash collection, receivables may be: (A) used as collateral for a loan (no transfer of risk) (assigning or pledging) (assigning or pledging)

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To accelerate cash collection, receivables may be: (A) used as collateral for a loan (no transfer of risk) (assigning or pledging) (assigning or pledging) (B) sold without recourse (transfer all risk) (C) sold with recourse (continuing involvement) (factoring or securitization) 3 Party Transactions

(A) Using Receivables as Collateral - Assigning or Pledging Receivables May 4th:Customers owe All American Store $10,000 in A/R for goods purchased May 14th:All American Store assigns the receivables to the factor receiving 80% of the face value & pays a 1% finance charge & 12% interest July 13rd:Customers pay the amounts owed to All American (never knowing they were part of this transaction). All American remits collections plus accrued interest All American: Cash AmntRecd Finance Charge %ofA/R Notes Payable Total Interest Notes Payable Total Cash AmntPd Factor: Notes Rec Total Finance Rev %ofA/R Cash AmntPd Cash AmntRecd IntRev %ofTotal Notes Rec Total

(B) Sell Receivables without Recourse: Factoring Receivables 3 Party Transaction: A = All American Store F = Factor C = Customer May 4th:Customers owe $10,000 for goods purchased from A May 14th:All American Store factors the receivables at a 10% finance charge, retains 3% of A/R, no recourse July 13rd:Customers pays the amounts owed to the Factor Benefits to A: 1. Immediate Cash 2. No Risk Transfer both form (title) & substance (control) All American: Cash AmntRecd Due from Factor%retained Loss on Sale of Rec FinanceChg Notes (Accts) Rec Total Factor: Notes (Accts)Rec Total Due to AllA %retained FinanceRevFinanceChg Cash AmntPd

(C) Sell Receivables with Recourse: Use a financial components approach 3 Party Transaction: A = All American Store F = Factor C = Customer May 4th:Customer owes $10,000 for goods purchased May 14th: All American Store factors the receivables at a 10% finance charge, retains 3% of A/R for probable losses, recourse obligation is $700 July 13rd:Customer pays the amount owed to factor Benefit to A: Immediate Cash … but maintains a continuing involvement All American: Cash AmntRec’d Due from Factor%retained Loss on Sale of Rec BV-NetProceeds Notes (Accts) Rec Total Recourse Liability Given Factor: Notes (Accts)Rec Total Due to AllA %retained FinanceRevFinanceChg Cash AmntPd

Cash AmntRecd Finance Charge %ofA/R Notes Payable Total Interest Notes Payable Total Cash AmntPd Notes Rec Total Finance Rev %ofA/R Cash AmntPd Cash AmntRecd IntRev %ofTotal Notes Rec Total (A) Using Receivables as Collateral Cash AmntRecd Due from Factor%retained Loss on Sale of Rec FinanceChg Notes (Accts) Rec Total Due to ___ %retained FinanceRevFinanceChg Cash AmntPd (B) Sell Receivables without Recourse Cash AmntRec’d Due from Factor%retained Loss on Sale of Rec BV-NetProceeds Notes (Accts) Rec Total Recourse Liability Given Notes (Accts)Rec Total Due to ___ %retained FinanceRevFinanceChg Cash AmntPd (C) Sell Receivables with Recourse On the Factor’s Books:

A transfer of receivables is a sale if the following 3 conditions are met: (1) the assets transferred are isolated from the transferor, (2) the transferee has the right to pledge or sell the assets, & (3) the transferor does not maintain control through a repurchase agreement