Question

Mountain High Ice Cream Company reports under IFRS. Mountain High transferred $72,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $6,200). Mountain High anticipates a $4,200 recourse obligation. The bank charges a 2% fee (2% of $72,000), and requires that amount to be paid at the start of the factoring arrangement. Mountain High has transferred control over the receivables, but determines that it still retains substantially all risks and rewards associated with them.

Required:
Prepare the journal entry to record the transfer on the books of Mountain High, considering whether the sale criteria under IFRS have been met.

General Journal

Debit Credit

Cash $63,360

Finance charge expense

Liability-financing arrangement

Answer 1

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Event	Account	Debit	Credit
1
	Cash (72000-(90-2)%)	63360
	Finance Charge Expense (72000*2%)	1440
	Liability Financing Management		64800
	Since Mountain high retains substantial risk and reward associated with receivable, transfer must be treated as secured borrowing.
	Receivable must stay at mountain balance sheet and should record liability.