CIMA Financial Reporting (F1) Practice Exam

What describes an acceptance credit?

Bank issues a letter of credit guaranteeing payment to the supplier. Bank accepts the instrument drawn upon by its customer and then sells it into a secondary market at a discount, passing the proceeds to its client. Bank purchases goods on behalf of the client and extends credit. Bank guarantees the payment of the instrument but does not buy it.

Correct Answer:

Bank accepts the instrument drawn upon by its customer and then sells it into a secondary market at a discount, passing the proceeds to its client.

Explanation:

An acceptance credit involves a banker's acceptance. The bank signs/accepts a bill of exchange drawn on its customer, making itself liable to pay when the bill matures. To raise cash for the customer, the bank then sells that accepted bill in the secondary market at a discount, passing the proceeds to the client. The bank earns income from the discount, while the instrument remains a negotiable obligation that can be transferred to others. This differs from a letter of credit, which is a payment obligation to the supplier; from the bank purchasing goods or extending credit directly to the client, and from merely guaranteeing the instrument without actually buying it.

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