E7-16 (Transfer of Receivables with Recourse) Beyoncé Corporation factors $175,0

Question

E7-16 (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, 2014. 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, 2014, for Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.

Explanation / Answer

Solution a:

Following conditions must be met for a transfer fo receivables with recourse to accounted for as a sale:

1. The transferred asset has been isolated from the transferor.

2. The transferees have obtained the right to exchange either the transferred assets or beneficial interests in the transferred assets.

3. The transferor does not have effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity.

Solution b:

Computation of Net Proceed - Beyoncé Corporation Particulars Amount Cash received ($175,000*94%) $164,500.00 Due from factor ($175,000*4%) $7,000.00 Less: Recourse Liability $2,000.00 Net Proceeds $169,500.00

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