Grace Corporation factors $200,000 of accounts receivable with Kelly Financing, Inc. on a with recourse basis. Kelly Financing will collect the receivables. The receivables records are transferred to Kelly Financing on April 10, 2012. Kelly Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 6% 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 the conditions from part (a) are met. Prepare the journal entry on April 10, 2012, for Graceto record the sale of receivables, assuming the recourse obligation has a fair value of $4,500.