Final answer:
No gain or loss on transfer of receivables is recorded when accounts receivables are used as collateral for a loan; it is a secured borrowing. Sun Inc. would record a finance fee expense of $20,000, which is 1% of the loan amount.
Step-by-step explanation:
When Sun Inc. pledges its accounts receivables as collateral for a loan, it does not directly result in a gain or loss on transfer of receivables. This is because the receivables are not being sold; they are being used as security for the loan. In accounting terms, this is a 'secured borrowing,' and the receivables would remain on Sun Inc.'s balance sheet while the loan itself would appear as a liability.
To calculate the finance fee, we use the 1% rate applied to the loan amount. Hence, for a $2 million loan, the finance fee Sun Inc. pays upfront would be 1% of $2 million, which equals $20,000. This fee is considered an expense and would be recorded in the period it was incurred.
Since there is no actual sale of the receivables, there is no gain or loss to be recognized on the transfer itself. The correct answer to this question is therefore d. $0. No gain or loss is recorded on the transfer of the receivables, but the finance fee of $20,000 is recorded as an expense.