Question

Part Two: Problem (10 points) On February 1, 2019, Norton Company factored accounts receivables with a carrying amount of $500,000 to Koch Bank. Koch Bank assesses a finance charge of 3% of the receivables and reserve 5% of the receivables. A. Assume the Norton factors the receivable on a without recourse basis. What is the loss on sale to be reported in the income statement of Norton Company for February? B. Assume the Norton factors the receivable on a with recourse basis. The recourse obligation has a fair value of $2,500. What conditions must be met for a factoring of receivables with recourse be accounted for as a sale? What is the loss on sale to be reported in the income statement of Norton Company for February assuming that all the conditions above are met? C. Prepare the required journal entry on Norton Company on February 1, 2019 assuming Norton factors the receivable on a with recourse basis. Omit explanation. Date Accounts Title and Explanation Rel D ebit Credit

Answer 1

A. Assume the Norton factors the receivable on a without recourse basis.
What is the loss on sale to be reported in the income statement of Norton Company for February?
Loss on Sale = $500,000 x 3%	$   15,000.00
B. Assume the Norton factors the receivable on a with recourse basis. The recourse obligation has a fair value of $2,500. What conditions must be met for a factoring of receivables with recourse be accounted for as a sale? What is the loss on sale to be reported in the income statement of Norton Company for February assuming that all the conditions above are met?
The conditions must be met for a factoring of receivables with recourse be accounted for as a sale:
1)The transferor surrenders control of the future economic benefits of the receivables.
2) The transferee cannot require the transferor to repurchase the receivables
3) The transferor's obligation under the recourse  provisions can be reasonably estimated.
Loss on sale = $500,000 x 3% = 2500	17500
C. Prepare the required journal entry on Norton Company on February 1, 2019 assuming Norton factors the receivable on a with recourse basis
Account Title and Explanation	Debit	Credit
Cash  ($500,000 x (1 - (3% + 5%)	$ 460,000.00
Due from Factor (500,000 x 3%)	$   15,000.00
Loss on Sale of Receivables	$   17,500.00
Recourse Liability		$     2,500.00
Accounts Receivable.		$ 500,000.00
Cash received ($500,000 X 92%)	$ 460,000.00
Due from factor ($500,000 x 5%)	$   25,000.00
Less:  Recourse obligation	$     2,500.00
Net proceed	$ 482,500.00
Loss on sale of receivables  = $500,000 - $472500	$   17,500.00