Question

Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.

Short answer

Theresource represents the guarantee of receiving payment from the seller of receivables for the uncollectible amount. It is considered as the liability of the seller.

Step-by-step solution

Definition of Liability

Any event that will create an outflow of economic benefits in the future period is known as liability. It can be current as well as non-current.

Definition of Resource and its Presentation in the Financial Statement

The resource can be defined as the guarantee provided by the seller of the accounts receivables regarding the uncollectible accounts receivables. The company selling receivables will pay the uncollectible amount to the factor. The resource represents the continuous involvement of the seller. It is reflected in the liabilities section of the balance sheet.