Reference no: EM132757958
Question: Today is December 30, 2019. In order to capture the attention of online shoppers, Cyber Retail Company had a "Buy Now, Pay Later" sale on Monday, December 2, 2019. The terms of the sale were such that anyone who bought merchandise was required to pay for the merchandise on (or before) February 28, 2020. For any customer who failed to pay by that date, Cyber Retail would "charge" that customer's purchase to the credit card account that the customer had provided at the time he/she placed the order.
Customers purchased $ 5,000,000 of merchandise during the "Buy Now, Pay Later" sale. Cyber estimates that if they waited until February 28, 2020, they would ultimately collect $4,800,000 related to this pool of receivables. One component of the difference, estimated at $ 50,000, relates to the "fees" that Cyber Retail would have to pay to the credit card companies upon receiving payment. The other $ 150,000 relates to "lost revenue" resulting from customers whose credit cards are rejected on February 28, 2020 when Cyber Retail processes the transactions. Cyber Retail believes it will be difficult to track down the customers at that point in time, and accordingly, has established an "Allowance Account" in the amount of $ 200,000 to reflect the credit card fees and lost revenue related to the portfolio of receivables.
Cyber Retail would like to monetize the portfolio of receivables prior to the end of the year, and has begun discussions with Friendly Factor Company. Friendly Factor Company has proposed the following deal:
i. Friendly Factor will pay Cyber Retail $ 4,700,000 on December 31, 2019
ii. Friendly Factor will retain all cash flows related the portfolio of receivables, and will retain all rights to pursue collection from customers whose credit cards are rejected on February 28, 2020. Friendly Factor believes that they will be able to collect 40% of any payments due from customers whose initial credit card is rejected.
iii. Cyber Retail will have no continuing involvement with the receivables, and Friendly Factor may resell any portion of them at any time if so inclined.
Based on the information provided above, if Cyber Retail accepts the deal proposed by Friendly Factor, Cyber Retail would report a GAIN / LOSS / NEITHER (circle one) in the amount of $ ___________________ (fill in the blank with the applicable amount or $ 0) at the time of the transaction.
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