A company is allowed to account for the transfer of receivables as a sale if which of the following conditions is met?

• A. The company continues to collect cash on behalf of the transferee without any restrictions.
• B. The company guarantees payment to the transferee in case of customer default.
• C. The company retains the risks and rewards of ownership of the receivables.
• D. The company surrenders control of the receivables and the transferee has the right to pledge or exchange them.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of transferring receivables. In financial accounting, transferring receivables refers to the process where a company sells or assigns its accounts receivable to another entity, often to improve cash flow or reduce credit risk.
2. Step 2: Review the criteria for accounting a transfer of receivables as a sale. According to accounting standards (e.g., ASC 860 in the U.S.), a transfer of receivables can be treated as a sale only if certain conditions are met.
3. Step 3: Analyze the conditions provided in the problem. The conditions include: (1) the company continues to collect cash on behalf of the transferee without restrictions, (2) the company guarantees payment in case of customer default, (3) the company retains risks and rewards of ownership, and (4) the company surrenders control of the receivables and the transferee has the right to pledge or exchange them.
4. Step 4: Apply the accounting principle of 'surrendering control.' For a transfer to qualify as a sale, the company must surrender control of the receivables, meaning it no longer has authority over them, and the transferee must have the ability to pledge or exchange the receivables freely.
5. Step 5: Conclude that the correct condition for accounting the transfer of receivables as a sale is when the company surrenders control of the receivables and the transferee has the right to pledge or exchange them. This aligns with the accounting standards for derecognition of financial assets.