1. Arness Woodcrafters sells $300,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 6% and retains an amount equal to 3% of accounts receivable. Arness estimates the fair value of the recourse obligation to be $8,000. Prepare the journal entry for (a) Arness and (b) Commercial Factors

(a)

Dr. Cash                                               $273,000

Dr. Receivable (Commercial Factor)  $9,000

Dr. Loss on sale of Receivables        $20,500

Cr. Account Receivables                    $300,000

Cr. Recourse Payable                         $8,000

(b)

Dr. Account Receivables                                $300,000

Dr. Recourse Receivable ($300,000 x 6%)  $18,000

Cr. Income from Recourse Services               $36,000

Cr. Cash                                                          $273,000

Cr. Account payable (Arness)                        $9,000

Explanation:

The fair value of recourse liability will be recorded by Arness, but the Commercial Factors Inc. will record the actual amount of 6% as receivable.

Cash is received excluding the finance charges and retained accounts receivables.

Net of Liabilities and receivable will be recorded as Loss on the recourse of receivables.

Cash $300,000 – ($300,000 X (.06 + .03)) = $273,000

Due from Factor ($300,000 X .03) = $9,000

Loss on Sale of Receivables = $20,500

Accounts Receivable = $300,000

Recourse Liability = $8,000