Beyonce Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis.

Question:

Beyonce Corporation factors $175,000 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, 2008. 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.

Instructions

(a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?

(b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2008, for Beyonce to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.

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