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To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with...

To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with recourse on 1/1/2018. Mock Bank agreed to collect the accounts receivable after the transaction, assessed a finance charge of 2% of the amount transferred and withheld an amount equal to 3% of the amount to cover probable uncollectible accounts. Randy prepared financial statements under ASPE. Assume the transaction qualified for the sale of receivables treatment. The recourse obligation had a fair value of $3,000.

1. Prepare a journal entry for Randy for the sale of receivables.

2. Prepare a journal entry for Mock Bank for the purchase of the receivables.

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Answer #1

1. In the books of Randy Co.

Account Titles and Explanation Debit Credit
Cash $66500
Loss on sale of Receivable ($70000*2%+$3,000) $4400
Due from factor ($70000*3%) $2100
  Recourse Liability $3,000
Accounts Receivable $70000
(To record the sale of Accounts receivable)

2. In the books of Mock Bank

Account Titles and Explanation Debit Credit
Accounts Receivable $70000
Due to factor $2100
Financing revenue $1400
Cash $66500
(To record the purchase of Acounts Receivable)
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