Alpha Inc. has receivables from unrelated parties with a face value of $5,000. It transfers these receivables to bank for $4,500, without recourse. It will continue to collect the receivables, depositing them in a non-interest-bearing bank account with the cash flows remitted to the bank at the end of each month. It is not allowed to sell or pledge the receivables to anyone else and is under no obligation to repurchase the receivables from bank. Which of the following is the appropriate treatment for these Accounts receivables?
A) It should show these receivables in its Balance Sheet.
B) It should amortize these receivables.
C) It should derecognize these receivables.
D) It should derecognize these receivables if it retains the interest earned on these.

Question

Quizplus · Accepted Answer

When Alpha Inc. transfers the receivables to the bank without recourse, it essentially sells the receivables to the bank. Since Alpha Inc. no longer has control over the receivables and is not allowed to pledge or sell them to anyone else, it must derecognize the receivables from its balance sheet. Therefore, the appropriate treatment for these accounts receivables is to derecognize them.

Alpha Inc Has Receivables from Unrelated Parties with a Face Value