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18 February, 21:26

Nash 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.

Assume that the conditions are met for the transfer of receivables with recourse to be accounted for as a sale. Prepare the journal entry on August 15, 2017, for Nash to record the sale of receivables, assuming the recourse liability has a fair value of $4,040.

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  1. 18 February, 21:51
    0
    Journal entries

    Explanation:

    Before passing the journal entries first we have to determine the following amounts

    Computation of net proceeds:

    Cash received ($175,000 * 94%) $164,500

    Add: Reserves amount ($175,000 * 4%) $7,000.

    Less: fair value of recourse liability - $4,040

    Net proceeds 167,460

    Now the gain or loss is

    = Net proceeds - Carrying value

    = $167,460 - $175,000

    = $7,540

    Now the journal entry is

    Cash $164,500

    Due from factors $7,000

    Loss on sale of receivables $7,540

    To Recourse liability $4,040

    To Account receivable $175,000

    (Being the sale of receivables is recorded)
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