Eyoncé Corporation factors $175,000 of accounts receivable
with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect
the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2014.
Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also
reserves an amount equal to 4% of accounts receivable to cover probable adjustments.
Instructions
(a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a
sale?
(b) Assume that the conditions are met for a transfer of receivables with recourse to be accounted for as a sale. Prepare the journal entry on August 15, 2020, for Blossom to record the sale of receivables, assuming the recourse obligation has a fair value of $3,910

a. Following conditions should be met:

1. The transferred asset has been isolated from the transferrer.

2. The transferees have obtained the right to pledge or to exchange the transferred asset.

3. The transferrer does not maintain any kind of control over transferred asset .

Explanation:

a. Following conditions should be met:

1. The transferred asset has been isolated from the transferrer.

2. The transferees have obtained the right to pledge or to exchange the transferred asset.

3. The transferrer does not maintain any kind of control over transferred asset

b) Computation of net proceeds:

Cash received(175,000×94%)=$164,500

Add Due from factor(175000×4%)=$7,000

Less recourse obligation=$2,000

Net proceeds=$169,500

Computation of gain or loss:

Carrying value=$175,000

Less net proceeds=$169,500

Loss=$5,500

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