How should jay plc account for the transaction

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Reference no: EM132771535

Jay plc enters into an agreement to assign its portfolio of £20 million trade receivables with recourse to factor Kima. The receivables have 90-day terms. Kima agrees to pay Jay plc an initial amount of £16 million in cash for the rights to the cash flows from the receivables. Once the receivables have been repaid, Kima will pay a further sum to Jay calculated as the balance of £4 million less interest on the £16 million initial payment until the date debtors pay (at 10%) and less any defaults (defined as any debts that remain unpaid after 120 days).

REQUIRED

Problem 1: How should Jay plc account for this transaction? Provide the rationale for your answer and specify the nature of risks that Jay retains or transfers to Kima.

Reference no: EM132771535

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