Question

On June 30, 2021, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $500,000 in accounts receivable to Dogwood Finance Company without recourse for a 5% fee. Option Two calls for Blondie to transfer the $500,000 in receivables to Dogwood with recourse. Dogwood's charges a 4% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $4,000 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie, Blondie estimates that the fair value of the final 15% of the receivables is $24,500 (ignoring the factoring fee).
Required:
1. Prepare any necessary journal entry or entries if receivables are factored under Option One.
2. Prepare any necessary journal entry or entries if receivables are factored under Option.

Answer 1

Answer:

1. Prepare any necessary journal entry or entries if receivables are factored under Option One.

Dr Cash 450,000  (=90% × $500,000)

Dr Loss on sale of receivables 50,000

   Cr Accounts receivable 500,000

Since the fair value of the remaining receivables ($24,500 ≤ $25,000) is less than the factoring fees, then the company should not expect to receive any more money and should record the loss immediately.

2. Prepare any necessary journal entry or entries if receivables are factored under Option (two)

Dr Cash 450,000  

Dr Receivable from factor 4,500 (= fair value $24,500 - $20,000)

Dr Loss on sale of receivables 49,500

    Cr Accounts receivable 500,000

    Cr Recourse liability 4,000

Since the fair value of the remaining receivables is higher than the factoring fees ($24,500 ≥ $20,000), then you must report a factoring receivable. Any recourse liability increases the company's losses.