E7-18 (LO6) (Transfer of Receivables with Recourse) Beyoncé Corporation factors
ID: 2338129 • Letter: E
Question
E7-18 (LO6) (Transfer of Receivables with Recourse) Beyoncé Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables reconds are transferred to Kathleen Battle Financing on August 15, 2017. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments Instructions a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? ( b) Assume the conditions from part (a) are met Prepare the journal entry on August 15, 2017, for Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.Explanation / Answer
Answer to part: (a)
Following conditions should be met:
Answer to part: (b)
On 15th August, 2017
Cash A/c Dr $ 164,500
Due from factor Dr $ 7,000
Loss on sale of receivables Dr $ 5,500
To Recourse Liability $ 2,000
To Accounts Receivable $ 175,000
( Being entry made for sale of receivable to factors with recourse)
Working notes:
Computation of net proceeds:
Cash received = $ 164,500 ($ 175,000 * (100-6)%)
Due from factor = $ 7,000 ($ 175,000 * 4%)
Less: Recourse liability = $ 2,000
Net proceeds = $ 169,500
Computation of gain or loss:
Carrying Value $ 175,000
Less: Net proceeds $ 169,500
Loss on sale of receivables $ 5,500
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