Question

Sun Inc. factors $6,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $300,000. What would be recorded as a gain (loss) on the transfer of receivables?

a. Gain of $180,000.
b. Loss of $480,000.
c. Gain of $1,080,000.
d. Loss of $300,000.

Answer 1

Sun Inc. would record a gain of $180,000 on the transfer of receivables. The correct answer is option (a).

Step-by-step explanation:

When a company factors its accounts receivables with recourse, it means that the finance company can recover any unpaid amount from the company if the customers do not pay. In this case, Sun Inc. factors $6,000,000 of its accounts receivables and pays a finance charge of 3%.

The finance company retains 10% ($600,000) of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $300,000. To calculate the gain or loss on the transfer of receivables, we need to compare the finance charge ($6,000,000 * 3% = $180,000) with the fair value of the recourse liability ($300,000).

If the finance charge is less than the fair value of the recourse liability, it results in a gain for Sun Inc. In this case, since the finance charge is less than the fair value ($180,000 < $300,000), Sun Inc. would record a gain of $180,000 on the transfer of receivables.