Question

On June 30, 2016, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $370,000 in accounts receivable to Dogwood Finance Company without recourse for a 6% fee. Option Two calls for Blondie to transfer the $370,000 in receivables to Dogwood with recourse. Dogwood's charges a 5% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $2,700 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 10% of the receivables is $23,500 (ignoring the factoring fee). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Required:
1.	Prepare any necessary journal entry or entries if receivables are factored under Option One.

      

2.	Prepare any necessary journal entry or entries if receivables are factored under Option Two.

    

Answer 1

Solution: Following is the required journal entries:

Particulars	Debit($)	Credit($)
(1) Cash(370000*90%)	333,000
Loss on sale of Receivables(balance)	35,700
Receivable from factor(fair value of $23500-fee[370000*6%])	1,300
Accounts receivable		370,000
(2) Cash(370000*90%)	333,000
Loss on sale of Receivables(balance)	34,700
Receivable from factor(fair value of $23500-fee[5%*370000])	5,000
Recourse liability		2,700
Accounts receivable		370,000