Question

Sandhill Corp. factors $444,000 of accounts receivable with Teal Finance Corporation on a without recourse basis on July 1, 2020. The receivables records are transferred to Teal Finance, which will receive the collections. Teal Finance assesses a finance charge of 1.80% of the amount of accounts receivable and retains an amount equal to 5% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.

Required:
a. Prepare the journal entry on July 1, 2020, for Reynolds Corp. to record the sale of receivables without recourse.
b. Prepare the journal entry on July 1, 2020, for Mateer Finance Corporation to record the purchase of receivables without recourse—please think through this.
c. Explain the difference between sale of receivables with recourse as oppose to without recourse.

Answer 1

a. Date Account Title and Explanation Debit Credit

1 - Jul Cash ($440,000-$22,000-$7,920) $410,080

Due from Factor ($440,000*5%) $22,000

Loss on sale of receivables ($440,000*1.8%) $7,920

Accounts receivable $440,000

(To record sale of accounts receivable to Factor)

b. Date Account Title and Explanation Debit Credit

1 - Jul Accounts receivable $440,000

Due to customer $22,000

Interest revenue $7,920

Cash $410,080

(To record purchase of accounts receivable)

c. Sale or financing of accounts receivables with recourse is a transaction in which a company sells its accounts receivable to a factoring company with an assurance to cover the risk of uncollectible.

Sale or financing of accounts receivables without recourse is a transaction in which the company selling its accounts receivables to a factoring company, in which the factoring company bears the risk of uncollectible.