Green-Orr Limited (GOL) is a retailer of various fast-moving consumer goods (FMCGs).

Due to the COVID-19 pandemic the entity has experienced reduced operating margins and liquidity concerns. As part of their process to manage liquidity concerns, they have considered factoring their accounts receivable (debtors book). Below is an extract from the notes to GOLs financial statements as at 31 July 2020:

Description	2020 (R)
Trade Debtors	2 000 000
Provision for Doubtful Debts	(150 000)
Prepayments	200 000
Trade and Other Receivables	2 050 000

GOL has approached DBC Bank for assistance with the factoring transaction. Below is a brief summary of the banks terms:

1.) DBC will give 80% of the value of accounts receivable as at 31 Jul 2020 to GOL. The remaining 20% will be recovered by DBC and paid over to GOL.

2.) The fee is 7.5% of the accounts receivable amounted stated above.

In order to manage GOLs cash flow more effectively, the CFO has expressed interest in using the Miller-Orr model. GOL invests its surplus cash at an annual rate of 7.5% and incurs R150 per transaction on buying and selling short-term securities. The expected daily cash balances and their probability distributions are as follows

Cash (R)	Probability
80 000	15%
90 000	40%
100 000	45%

The acceptable lower limit of cash holding is R20 000.

3.1 In terms of International Financial Reporting Standards (IFRS) 9: Financial Instruments, discuss how accounts receivable should be measured in GOLs financial statements. In addition, provide the initial journal entry (debit/s and credit/s) if GOL decided to enter into the (14)

3.2 Based on managements forecast and using the Miller-Orr Model, calculate the target cash level GOL should hold in order to allow for effective management of their cash flows.

Below is the formula for Miller-Orr:

Optimal return point = (33 x cost per order x variance of daily cash balances)/(4 x daily interest rate on marketable securities) + Lower cash limit (11) [25 marks]