Problem 3 Reynolds Corp. factors $400,000 of accounts receivable with Mateer Fin

Question

Problem 3

Reynolds Corp. factors $400,000 of accounts receivable with Mateer Finance Corporation on a without recourse basis on July 1, 2015. The receivables records are transferred to Mateer Finance, which will receive the collections. Mateer Finance assesses a finance charge of 1 ½ percent 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.

Required:

a. Prepare the journal entry on July 1, 2015, for Reynolds Corp. to record the sale of receivables without recourse.

b. Prepare the journal entry on July 1, 2015, for Mateer Finance Corporation to record the purchase of receivables without recourse—please think through this.

c. Explain the difference between sale of receivables with recourse as oppose to without recourse.

Explanation / Answer

a. Journal entry in the books of Reynolds Corp Date Account Title and Explanation Post Ref. Debit Credit 1-Jul Cash ($400,000 $16,000 $6,000) $378,000 2015 Due from Factor ($400,000 × 4%) $16,000 Loss on sale of receivables ($400,000 × 1.5%) $6,000                   Accounts receivable $400,000 To record sale of accounts receivable to Factor b. Journal entry in the books of Mateer Finance Corporation Date Account Title and Explanation Post Ref. Debit Credit 1-Jul Accounts receivable $400,000 2015                  Due to customer $16,000                  Interest revenue $6,000                  Cash $378,000 To record purchase of accounts receivable c. In a sale of accounts receivable with recourse, the seller undertakes to pay the factor for the amounts of the uncollectible account and the fair value of recourse obligation is reported as a liability on the seller's balance sheet using the financial components model as this obligation involves continuing involvement of seller after the sale.

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