Question

(Transfer of Receivables without Recourse) JFK Corp. factored $300,000 of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2017. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1½% of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.

Instructions

(a) Prepare the journal entry on July 1, 2017, for JFK Corp. to record the sale of receivables without recourse.

(b) Prepare the journal entry on July 1, 2017, for LBJ Finance Corporation to record the purchase of receivables without recourse.

Short answer

Seller of Accounts receivables generates a loss of$4,500

Step-by-step solution

Definition of Bad Debts

The amount due from customers that prove or are estimated to be uncollectible is reported as bad debt expenses by the business entity.

Journal Entries for Sale of Receivables Without Resource

Date	Accounts and Explanation	Debit $	Credit $
1 July	Cash	$283,500
	Due from Factor$\left(\$300,000\times 4\%\right)$	$12,000
	Loss on sale$\left(\$300,000\times 1·5\%\right)$	$4,500
	Accounts receivables		$300,000

Journal Entries for Purchase of Receivables Without Resource

Date	Accounts and Explanation	Debit $	Credit $
1 July	Account receivable	$300,000
	Due to JKF Corp$\left(\$300,000\times 4\%\right)$		$12,000
	Interest revenue$\left(\$300,000\times 1·5\%\right)$		$4,500
	Cash		$283,500