Question

Which of the following is true when accounts receivable are factored without recourse?

A) The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
B) It is considered an outright sale of the receivables.
C) The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables.
D) The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.

Answer 1

When accounts receivable are factored without recourse, the factor assumes the risk of collectability and absorbs any credit losses, effectively making it an outright sale of the receivables.

Step-by-step explanation:

When accounts receivable are factored without recourse, the following statement is true: The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables. This means that the company selling the receivables (the factor) is fully responsible for any debts that they cannot collect, which could include payments being late or not being received at all. In contrast, factoring with recourse would mean that the seller of the receivables would still be on the hook for any bad debts. This situation is more like an outright sale rather than a loan with security. The transaction is generally treated as a sale in the company's financial statements, as the risks and rewards of owning the receivables have been transferred to the factor.