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Jay plc enters into an agreement to assign its portfolio of £20 million trade receivables with recourse to factor Kima. The receivables have 90-day terms. Kima agrees to pay Jay plc an initial amount of £16 million in cash for the rights to the cash flows from the receivables. Once the receivables have been repaid, Kima will pay a further sum to Jay calculated as the balance of £4 million less interest on the £16 million initial payment until the date debtors pay (at 10%) and less any defaults (defined as any debts that remain unpaid after 120 days).
REQUIRED
Problem 1: How should Jay plc account for this transaction? Provide the rationale for your answer and specify the nature of risks that Jay retains or transfers to Kima.
Justify your recommendation using quantitative and qualitative issues and your analysis of probable risks relating to the project
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