Using accounts receivable to achieve off-balance-sheet financing. Cypres Appliance Store has ($ 100,000) of accounts receivable on
Question:
Using accounts receivable to achieve off-balance-sheet financing. Cypres Appliance Store has \(\$ 100,000\) of accounts receivable on its books on January 2, Year 2. These receivables are due on December 31, Year 2. The firm desires to use these accounts receivables to obtain financing.
a. Prepare journal entries during Year 2 for the transactions in parts (i) and (ii) below:
(i) The firm borrows \(\$ 89,286\) from its bank, using the accounts receivable as collateral. The loan is repayable on December 31, Year 2, with interest at 12 percent.
(ii) The firm sells the accounts receivable to the bank for \(\$ 89,286\). It collects amounts due from customers on these accounts and remits the cash to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Cypres Appliance Store attempt to structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?
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