Question

Assume the following:

a. Santa Teresa transferred A/R that has a book value of $600,000. Transfer was made without recourse. Factor Bank immediately remitted to Santa Teresa cash equal to 90% of the factored amount. Factoring fee is 4% of the total factored amount. Santa Teresa has a "beneficial interest" in the transferred receivables, which management estimates to equal $50,000. What is the journal entry to record all of this?
b. Now, Santa Teresa sold the receivables to Factor Bank with recourse and estimates the fair value of the recourse obligation to be $5,000. What is the journal entry?

Answer 1

The journal entries for factoring accounts receivable differ based on whether the factoring is with or without recourse. Without recourse involves creating entries for cash received, loss, due from factor, accounts receivable, and beneficial interest. With recourse, an additional entry for recourse liability is also made.

Step-by-step explanation:

The student's question involves understanding the journal entries for factoring receivables both with recourse and without recourse. When Santa Teresa factors its accounts receivable without recourse, Factor Bank assumes the risk of uncollectible accounts, and Santa Teresa must recognize the financial impact of this transaction on their books.

To record the without-recourse factor transaction:
Debit Cash $540,000
Debit Loss on sale of receivables $24,000
Debit Due from Factor $50,000
Credit Accounts Receivable $600,000
Credit Beneficial interest $14,000

For the with-recourse factoring situation where Santa Teresa estimates the fair value of the recourse obligation to be $5,000, they must acknowledge the potential liability.

To record the with-recourse factor transaction:
Debit Cash $540,000
Debit Loss on sale of receivables $24,000
Debit Due from Factor $50,000
Debit Recourse Liability $5,000
Credit Accounts Receivable $600,000
Credit Beneficial interest $19,000