Question

How would a company's total liabilties be different if they had factored $200,000 worth of A/R without recourse instead of assigning them?

Would their liabilties go up, down, or stay the same?

Answer 1

Solution: -

When a company factor it's a/r with out recourse, which means the factor cannot ask money back if there is any uncollectables... So the company records following journal entry -

Cash a/c dr. - what is amount received

Interest a/c dr. - the difference between cash received and a/r

To a/r a/c cr. - $200,000

In above entry you can see there is no liability impacted. Hence, in case of factoring without recourse, liability stay the same.

Additionally, liabilities go up if factoring with re-course where the factor can demand money back if there is uncollectables. Inthis case company records credit liability instead of a/r.

Hope this will suffice your requirements.