Question

E7.17B (LO 5)(Transfer of Receivables with Recourse) Leon Quartet Inc. factors receivables with a carrying amount...

E7.17B (LO 5)(Transfer of Receivables with Recourse) Leon Quartet Inc. factors receivables with a carrying amount of $220,000 to Joffrey Company for $170,000 on a with recourse basis.

Instructions

The recourse provision has a fair value of $1,000. This transaction should be recorded as a sale.

a) Prepare the appropriate journal entry to record this transaction on the books of Leon Quartet Inc.

b) Record the necessary journal entries, assuming that the sale was without recourse, i.e. the fair value of

the recourse obligation was zero.

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Homework Answers

Answer #1

1.with recourse basis-under this the factoring company is secured. any bad debts may be recovered from security.

Cash received 170000
Less: recourse liability 1000
Net proceeds 169000$
Loss on sale of receivables
carrying value 220000
Net proceeds 169000
Loss [220000-169000] 51000$

Journal entry

debit credit
Cash $170,000
Loss on sale of receivables $51,000
Recourse liability $1,000
Accounts receivable $220,000

2. without recourse-under this the factor may set off the retained amount against any bad debts that may arise only upto the retained amount.

cash 170,000
due from factor 50,000
account receivable 220,000
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