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.
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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