Final answer:
The gain on the transfer of receivables is calculated by subtracting the finance charge and the amount retained from the amount factored, and then subtracting the fair value of the recourse liability. The resulting gain for Sun Inc. would be $2,460,000.
Step-by-step explanation:
The question is asking for the calculation of the gain or loss on the transfer of receivables when Sun Inc. factors accounts receivables with recourse. Sun Inc. factors $3,000,000 of its accounts receivables at a 3% finance charge. Additionally, the finance company retains 10% of the accounts receivable as a reserve for possible adjustments. The fair value of the recourse liability is estimated at $150,000. Here's how the calculation would work:
- Amount factored: $3,000,000
- Finance charge at 3%: $3,000,000 x 3% = $90,000
- Amount retained (10% of receivables): $3,000,000 x 10% = $300,000
- Proceeds received (Amount factored - Finance charge - Amount retained): $3,000,000 - $90,000 - $300,000 = $2,610,000
- Recourse liability: $150,000
- Gain (Loss) on transfer (Proceeds received - Recourse liability): $2,610,000 - $150,000 = $2,460,000
Sun Inc. would record the proceeds of $2,610,000 as a debit to cash, a credit of $3,000,000 to accounts receivable, and a debit of $90,000 to finance charge expense. Additionally, there would be a liability recorded for the recourse obligation of $150,000. The net effect on the income statement would be a gain of $2,460,000.