Question

Caria Vista Incorporated sold $280,000 of accounts receivable to Martinez Factors Inc. on a with recourse basis. Martinez assesses a 2% finance charge of the balance of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entries for Carla Vista Incorporated and Martinez Factors to record the sale of the accounts receivable to Martinez, assuming that the recourse liability has a fair value of $14,000. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. List all debit entries before credit entries.) Account Titles and Explanation Debit Credit Carla Vista Incorporated Martinez Factors Inc.

Answer 1

Journal entries for both companies, Carla Vista Incorporated and Martinez Factors Inc., reflect the sale and purchase of accounts receivable on a with recourse basis, including the finance charge, funds retained for adjustments, and the recognition of the recourse liability.

Step-by-step explanation:

The transaction involves a sale of accounts receivable with recourse, which means that Carla Vista Incorporated retains a potential obligation for the receivables should some of them be uncollectible. The following journal entries for both companies would be required to record the sale:

Carla Vista Incorporated

When receivables are sold:
Cash ......................... [Debit account for $259,200]
Loss on Sale of Receivables .... [Debit account for $14,000]
Due from Factor ............... [Debit account for $16,800]
Accounts Receivable ........... [Credit account for $280,000]
Martinez Factors Inc.

When receivables are purchased:
Accounts Receivable ........... [Debit account for $280,000]
Cash .......................... [Credit account for $259,200]
Due to Carla Vista ............ [Credit account for $16,800]