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Indigo Corporation factors $256,800 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2020. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments. (b) Assume that the conditions are met for a transfer of receivables with recourse to be accounted for as a sale. Prepare the journal entry on August 15, 2020, for Indigo to record the sale of receivables, assuming the recourse obligation has a fair value of $4,660.

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Answer:

The journal entry on August 15, 2020  is as follows:

August 15, 2020

Cash                                $241,392  

Due from factors                 $10,272  

Loss on sale of receivables $7,136  

                                                  Recourse liability  $2,000

                                                 Account receivable  $256,800

Explanation:

In order to prepare the journal entry on August 15, 2020, we would have to get the the computation of net proceeds and then the Computation of gain or loss.

Therefore, Computation of net proceeds=

Cash received($256,800×94%)=$241,392

Add Due from factor($256,800×4%)=$10,272

Less recourse obligation=$2,000

Hence, Net proceeds=$249,664

Next, we calculate the Computation of gain or loss=

Carrying value=$256,800

Less net proceeds=$249,664

Hence, there is a Loss=$7,136

Therefore, the journal entry on August 15, 2020  is as follows:

August 15, 2020

Cash                                $241,392  

Due from factors                 $10,272  

Loss on sale of receivables $7,136  

                                                  Recourse liability  $2,000

                                                 Account receivable  $256,800

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