Question

Use the information presented in BE7-12 for Arness Woodcrafters but assume that the recourse liability has a fair value of \(4,000, instead of \)8,000. Prepare the journal entry and discuss the effects of this change in the value of the recourse liability on Arness’s financial statements.

Short answer

Reduction in resource liability willreduce the liability and lossfor the business entity.

Step-by-step solution

Definition of Financial Statements

All the schedules reflecting the business transaction summary that occurred during a financial period are known as financial statements. It reports only transactions of financial nature.

Journal Entries for Arness

Date	Accounts and Explanation	Debit $	Credit $
	Cash	$227,500
	Loss on sale of receivables$\left[\left(\$250,000\times 5\%\right)+4,000\right]$	$16,500
	Due from Factor$\left(\$250,000\times 4\%\right)$	$10,000
	Accounts receivables		$250,000
	Resource liability		$4,000

Effect of Change in Value of the Resource Liability

1. Change in the resource liability reported on the financial statement. It will reflect a reduction in the value.
2. Loss on sale will also reduce on the income statement.