Alpha Inc Has Receivables from Unrelated Parties with a Face Value

question 48

Multiple Choice

Alpha Inc. has receivables from unrelated parties with a face value of $5,000. It transfers these receivables to bank for $4,500, without recourse. It will continue to collect the receivables, depositing them in a non-interest-bearing bank account with the cash flows remitted to the bank at the end of each month. It is not allowed to sell or pledge the receivables to anyone else and is under no obligation to repurchase the receivables from bank. Which of the following is the appropriate treatment for these Accounts receivables?

• A) It should show these receivables in its Balance Sheet.
• B) It should amortize these receivables.
• C) It should derecognize these receivables.
• D) It should derecognize these receivables if it retains the interest earned on these.

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Definitions:

Capital Structure Policy

Refers to the decisions a company makes regarding the mix of long-term debt and equity financing in its capital structure.

Financial Risk

The potential for monetary loss in investing or engaging in a business enterprise.

Capital Asset Pricing Model

A model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

M&M Proposition I

Modigliani and Miller Proposition I states that in a world without taxes, bankruptcy costs, and asymmetric information, a firm's value is unaffected by how it is financed, whether by debt or equity.