On June 30, 2016, Blondie Fixtures was considering alternatives to bolster its c

Question

On June 30, 2016, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $420,000 in accounts receivable to Dogwood Finance Company without recourse for a 4% fee. Option Two calls for Blondie to transfer the $420,000 in receivables to Dogwood with recourse. Dogwood's charges a 3% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $3,200 recourse liability. Under either option, Dogwood will immediately remit 85% of the factored receivables to Blondie, and retain 15%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 15% of the receivables is $26,000 (ignoring the factoring fee).

Explanation / Answer

journal entry for option 1

receivable from factor

(fair value of $26000 less fee (4% on 420000)

journal entry for option 2

receivable from factor

(fair value $26000 less fee (3% of 420000)

cash (85% of 420000) 357000 loss on receivables (to balance) 72200

receivable from factor

(fair value of $26000 less fee (4% on 420000)

9200 accounts receivable 420000 (to record entry of receivables factored without recourse)

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