Their receivables in a borrowing arrangement whereby

Info icon This preview shows pages 6–9. Sign up to view the full content.

View Full Document Right Arrow Icon
their receivables in a borrowing arrangement whereby the A/R serve as collateral. Assignment can be of two types: 1. General assignment: All of the receivables serve as collateral for the note (the borrowed funds). The company records the following journal entry: Cash .................... x Notes payable ............. x No journal entry is made to the A/R to record the assignment. However, the arrangement should be disclosed parenthetically or in a note. New A/R can be substituted for the ones collected during the loan period. If the company fails to pay back the loan, the lender can seize the assigned A/R. B. Specific assignment: Specific A/R are assigned as collateral. (Under general assignment, only a general dollar amount of A/R are assigned.) The borrower and lender agree on the conditions: (1) who is to receive the collections (2) the finance charges (in addition to any interest on the borrowed funds) (3) the specific accounts that will serve as collateral (4) notification or non-notification of the account debtors The following journal entries recognize the liability and reclassify the assigned A/R:
Image of page 6

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 7, p. 7 Cash .............................. x N/P ...................................... x A/R (assigned) ............ x A/R ...................................... x C. Example (E7-11, K&W, 9 th ed.) Prepare journal entries for A.E. Housman Company for the following events: 1. Customers' accounts in the amount of $40,000 are assigned (designated) to the W.B. Yeats Finance Company as security for a loan of $30,000. The finance charge is 4% of the amount borrowed. 2. Cash collections on assigned accounts amount to $18,000. 3. Collections on assigned accounts to date, plus a $300 check for interest on the loan, are forwarded to W.B. Yeats Finance Company. 4. Additional collections on assigned accounts amount to $16,200. 5. The loan is paid in full plus additional interest of $120. Cash 30,000 Notes Payable 30,000 A/R (Assigned) 40,000 A/R 40,000 Cash 18,000 A/R (Assigned) 18,000 Interest Expense 300 Notes Payable 18,000 Cash 18.300 Cash 16,200 A/R (Assigned) 16,200 Notes Payable 12,000 Interest Exp. 120 Cash 12,120 E. Disposition of A/R: Transfers
Image of page 7
Chapter 7, p. 8 1. (See also E7-14, K&W, 9th ed.) Donald Trumpet Corporation factors $300,000 of accounts receivable with Money R Us, Inc. on a with recourse basis. Money R Us will collect the receivables. The receivable records are transferred to Money R Us on September 1, 1999. Money R Us assesses a finance charge of 3% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments. Required : a. What three conditions must be met for a transfer of receivables with recourse to be accounted for as a sale (SFAS 77)? Answer: 1. Transferor surrenders control of the receivables; 2. Obligations of transferor, if any (e.g., "with recourse" provisions) are estimable; 3. Requirement of repurchase by transferor is limited (to avoid sham sales transactions). b. Assuming that the above transfer can be treated as a sale, prepare the journal entry on September 1, 1999 for Donald Trumpet Corporation to record the sale of the receivables. Assume that the recourse obligation has a fair value of $2,000.
Image of page 8

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern