Question

Reynolds Corp. factors $400,000 of accounts receivable with Mateer Finance Corporation on a without recourse basis on July 1, 2015. The receivables records are transferred to Mateer Finance, which will receive the collections. Mateer Finance assesses a finance charge of 1 ½ percent of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.

Required:

a. Prepare the journal entry on July 1, 2015, for Reynolds Corp. to record the sale of receivables without recourse.

b. Prepare the journal entry on July 1, 2015, for Mateer Finance Corporation to record the purchase of receivables without recourse—please think through this.

c. Explain the difference between sale of receivables with recourse as oppose to without recourse.

Answer 1

a. Journal entry in the books of Reynolds Corp

Date Account Title and Explanation Post Ref. Debit Credit

1-Jul Cash ($400,000 − $16,000 − $6,000) ($378,000)

2015 Due from Factor ($400,000 × 4%) ($16,000)

Loss on sale of receivables ($400,000 × 1.5%) ($6,000)

Accounts receivable $400,000

To record sale of accounts receivable without recourse.

b. Journal entry in the books of Mateer Finance Corporation

Date Account Title and Explanation Post Ref. Debit Credit

1-Jul Accounts receivable $400,000

2015 Due to customer $16,000

Interest revenue $6,000

Cash $378,000

To record the purchase of receivables

c. In a sale of accounts receivable with recourse, the seller undertakes to pay the factor for the amounts of the uncollectible account and the fair value of recourse obligation is reported as a liability on the seller's balance sheet using the financial components model as this obligation involves continuing involvement of seller after the sale.