Purpose: This exercise will help you to compare two possible ways of structuring a sale of accounts receivable (1) without recourse, or (2) with recourse.
Jedd Hale Corporation factors $90,000 of accounts receivable with Klein-Seay Financing, Inc. Klein-Seay Financing will collect the receivables. The receivable records are transferred to Klein-Seay Financing on August 15, 2014. Klein-Seay Financing assesses a finance charge of 4% of the amount of accounts receivable and also retains an amount equal to 6% of accounts receivable to cover probable adjustments.
Instructions
(a) Explain the conditions that must be met for a transfer of receivables with recourse to be accounted for as a sale.
(b) Explain when the financial components approach is used in accounting for a transfer of accounts receivable.
(c) Prepare the journal entry for both Jedd Hale Corporation and Klein-Seay Financing to record the transfer of accounts receivable on August 15, 2014 assuming the receivables are sold without recourse.
(d) Prepare the journal entry for both Jedd Hale Corporation and Klein-Seay Financing to record the transfer of accounts receivable on August 15, 2014 assuming the receivables are sold with recourse and the conditions required for sale accounting are met. Further, assume the recourse obligation has a fair value of $2,000.