Question

Nash Corporation factors $175,000 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, 2017. 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, 2017, for Nash to record the sale of receivables, assuming the recourse liability has a fair value of $4,040.

Answer 1

Journal entries

Step-by-step explanation:

Before passing the journal entries first we have to determine the following amounts

Computation of net proceeds:

Cash received ($175,000 × 94%) $164,500

Add: Reserves amount ($175,000 ×4%) $7,000.

Less: fair value of recourse liability - $4,040

Net proceeds 167,460

Now the gain or loss is

= Net proceeds - Carrying value

= $167,460 - $175,000

= $7,540

Now the journal entry is

Cash $164,500

Due from factors $7,000

Loss on sale of receivables $7,540

To Recourse liability $4,040

To Account receivable $175,000

(Being the sale of receivables is recorded)