Question

Green-Orr Limited (GOL) is a retailer of various fast-moving consumer goods (FMCG’s).

Due to the COVID-19 pandemic the entity has experienced reduced operating margins and liquidity concerns. As part of their process to manage liquidity concerns, they have considered factoring their accounts receivable (debtors’ book). Below is an extract from the notes to GOL’s financial statements as at 31 July 2020:

Description	2020 (R)
Trade Debtors	2 000 000
Provision for Doubtful Debts	(150 000)
Prepayments	200 000
Trade and Other Receivables	2 050 000

GOL has approached DBC Bank for assistance with the factoring transaction. Below is a brief summary of the bank’s terms:

1.) DBC will give 80% of the value of accounts receivable as at 31 July 2020 to GOL. The remaining 20% will be recovered by DBC and paid over to GOL.

2.) The fee is 7.5% of the accounts receivable amounted stated above.

In terms of International Financial Reporting Standards (IFRS) 9: Financial Instruments, discuss how accounts receivable should be measured in GOL’s financial statements. In addition, provide the initial journal entry (debit/s and credit/s) if GOL decided to enter into the factoring agreement (14)

Answer 1

In the above case it is clearly saying that the company (DBC) is giving cash asper colloction of debtors that all debtors amount will give to GOL after and charge an interest of 7.5% that is transfering with recourse

the initial entry will be

Cash account DR ((2,000,000-(2000000*7.5%)*80%) ) 1,480,000

Due from factor hold back Dr ( 2,000,000*20%) 370,000

To Short term debt Cr 1,850,000

While recieving the balance amount

Cash account Dr 370,000

To due from factor hold back Cr 370,000

Final entry

Short term Debt Account Dr 1,850,000

Interest Expense Dr 150,000

To Accounts Recievable 2,000,000

so the initial stage of facoring there will be increasing cash , an asset and a liability