Sale of Receivables with Recourse

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delhirocks

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Quick question on receivable sale. (FSA)
While making analytical adjustments, we treat this as a collateralized debt. For Income statement adjustments, Schweser says we should add the interest on receivable to both interest & expense. Hence Net Income will not be affected. (Pg 228)

I understand why we increase the interest expense (treat as borrowing), but why do we increase the interest income?

Any insights are appreciated...
 
I asked the same question in prep for the June exam...the thread is below:

http://www.analystforum.com/phorums/read.php?11,548425,548854#msg-548854

Hope this helps.
 
thread in the link above makes a lot of sense: i understand that the whole transaction should be looked upon as a financing once -so we have to exempt the operating income from the sins of borrowing.(so increase EBIT).

..but mwvt9, in the example in the thread above why did the sale of receivables worth 100 happen for 90?. does it always have to happen at the same discount as the interest expense ?.

this might be a dumb question but why is it "implicit interest"?.

thanks in advance
 
i searched AF posts for "with recourse" and found some satisfactory answers in the L 2 forum:

the a/r of 100 is the FV of the receivables. since the co. needs the money today, it will receive only the PV of the receivables -which can be obtained by discounting the FV by a factor which the A/R "financer" will be be willing to accept for paying cash today.

anyway, i would think this interest rate would be pretty "explicit" when the A/R sale is made into contract. so why call it implicit .
 
Dsylexic Wrote:
-------------------------------------------------------
> i searched AF posts for "with recourse" and found
> some satisfactory answers in the L 2 forum:
>
> the a/r of 100 is the FV of the receivables. since
> the co. needs the money today, it will receive
> only the PV of the receivables -which can be
> obtained by discounting the FV by a factor which
> the A/R "financer" will be be willing to accept
> for paying cash today.
>

Looks right to me.

> anyway, i would think this interest rate would be
> pretty "explicit" when the A/R sale is made into
> contract. so why call it implicit .

It would be implicit because the difference between the FV and PV is the effective interest rate on the loan. It insn't explicit because no interest is actually being paid.
 
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