D Ltd has a balance on its receivable’s account of £100,000. Previous experience would anticipate bad debts to a maximum of 3%. The company adopts a policy of factoring its receivables.

Explain how the transaction would be dealt with in the books of D Ltd under each of the following independent sets of circumstances:

(i) The factoring agreement involves a sole payment of £95,000 to complete the transaction. No further payments are to be made or received by either party to the agreement.

(ii) The receivables are transferred to the factoring entity on receipt of £93,000. The agreement provides for further payments, which will vary on the basis of timing and receipts from debtors.

Interest is chargeable by the factor on a daily basis, based on the outstanding amount at the close of the day’s transactions. The factor also has recourse to D Ltd for the first £10,000 of any loss.