Humphrey Incorporated decided to sell half of their Accounts Receivable balance to Bass Industries in order to get cash to purchase a new newspaper facility. On March 1st, Humphrey Inc. sold $1,600,000 of their AR balance without recourse. Under the arrangement, Humphrey was to handle disputes concerning service, and Bass Industries was to make the collections, handle the sales discounts, and absorb the credit losses. Bass’s factoring transaction assesses a 6% finance charge on the amount of receivables. They also retain 2% of the AR balance for to cover sales discounts.
Instructions
(a) Prepare the journal entry required on Humphrey’s books on March 1.
(b) Prepare the journal entry required on Bass Industries’ books on March 1.
(c) Assume Humphrey factors the $1,600,000 of accounts receivable with Bass Industries on a with recourse basis instead. The recourse provision has a fair value of $28,000. Prepare the journal entry required on Humphrey’s books on March 1.