Question

(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 records 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.

Short answer

The business entity will generate a loss of$5,500 on the sale of receivables.

Step-by-step solution

Definition of Receivables

The asset that reflects the benefits that a business entity will generate by collecting cash from the customers to whom sales are made on credit is known as receivable.

Conditions for recording the transfer of receivable as sale

1. The asset or receivable transferred must be kept away from the transferor.
2. The transferee must have the right to generate cash from the receivables or assets.
3. The transferor does not have control over the receivables and does not have any agreement to repurchase.

Journal entry for the sale of receivable

Date	Accounts and Explanation	Debit $	Credit $
	Cash	$164,500
	Due from Factor	$7,000
	Loss on sale of receivable	$5,500
	Resource liability		$2,000
	Accounts receivables		$175,000

Working note:

1. Calculation of net proceeds:

Particular	Amount $
Cash Received $\left(\$175,000\times \left(100\%-2\%-4\%\right)\right)$	$164,500
Add: Due from factor $\left(\$175,000\times 4\%\right)$	7,000
	$171,500
Less: Resource liability	(2,000)
Net Proceeds	$169,500

Calculation of gain or loss:

Particular	Amount $
Carrying value	$175,000
Less: Net proceeds	(169,500)
Loss	$5,500