On November 1, Year 1, Farley Corporation sells receivables due in six months with a carrying amount of $100,000 to Town Square Bank for a cash payment of $95,000, subject to full recourse. Under the right of recourse, Farley Corporation is obligated to compensate Town Square Bank for the failure of any debtor to pay when due. In addition to the recourse, Town Square Bank is entitled to sell the receivables back to Farley Corporation in the event of unfavorable changes in interest rates or credit rating of the underlying debtors.
Required:
Determine the appropriate accounting by Farley Corporation for the sale of receivables. Prepare any necessary journal entries for Year 1.