Problem 1:
Securitization
Kendall Corporation designs and manufactures sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 2011, to improve its cash flow, Kendall establishes a securitization entity (SE) and (1) transfers wit out recourse $20.5 million of its receivables to the SE and (2) surrenders control over these receivables. The SE then sells securities backed by the cash flows associated with Kendall's receivables. Because the SE is separate from Kendall, and the receivables are diversified across hundreds of customers, investors are willing to pay $24 million for the securities. The SE then transfers the $24 million to Kendall Corporation.
a. Prepare Kendall's entry to record the securitization as a sale.
b. Show how your answer to requirement 1 would change if control over the receivables is not surrendered at the time of the transfer (i.e., an agreement exists whereby Kendall would be forced to absorb significant losses associated with the SE's receivables).
Problem 2:
Accounts receivable
Following is the financial statements of Buffalo Supply Company, a provider of plumbing fixtures to contractors in central Pennsylvania.
Fiscal Years Ended October 31,
2011 2010 2009
From Income Statements
Revenues $3,519,444 $3,877,135 $2,969,981
Bad debt expense 45,753 50,403 38,610
From Balance Sheets
Gross accounts receivable $ 345,044 $ 362,349 $ 282,855
Less: Allowance for doubtful accounts (54,654) (74,365) $ (47,612)
Net accounts receivable $ 290,390 $ 287,984 $ 235,243
a. Reconstruct all journal entries pertaining to Gross accounts receivable and Allowance for doubtful accounts for the fiscal year ended October 31, 2011. Assume that all revenues are from credit sales.
b. Do a T-account analysis of both accounts, starting with the allowance account.