Question

Wildhorse Corporation factors $266,800 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2020. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.

Assume that the conditions are met for the transfer of receivables with recourse to be accounted for as a sale. Prepare the journal entry on August 15, 2014, for Beyoncé to record the sale of receivables, assuming the recourse liability has a fair value of $4,650. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Date Account Titles and Explanation Debit Credit August 15, 2014

Answer 1

Denit Cash for $250,792; Debit Due from factors for $10,672; Debit Loss on Sale of receivables for $9,986; Credit Recourse liability for $4,650; and Credit Accounts receivable for $266,800.

Step-by-step explanation:

The following are calculated first before preparing the journal entry:

Cash received = Factored amount * (100% - Finance charge percentage - Percentage reserved for probable adjustments) = $266,800 * (100% - 2% - 4%) = $250,792

Due from factors = Factored amount * Percentage reserved for probable adjustments = $266,800 * 4% = $10,672

Loss on Sale of receivables = (Factored amount * Finance charge percentage) + Fair value of recourse liability = ($266,800 * 2%) + $4,650 = $9,986

The journal entry will now appear as follows:

Date Account Titles and Explanation Debit ($) Credit ($)

15 Aug 2014 Cash 250,792

Due from factors 10,672

Loss on Sale of receivables 9,986

Recourse liability 4,650

Accounts receivable 266,800

(To record the sale of receivables.)