Chessman Corporation factors $600,000 of accounts receivable with Liquidity Financing, Inc. on a with recourse basis. Liquidity

Question:

Chessman Corporation factors $600,000 of accounts receivable with Liquidity Financing, Inc. on a with recourse basis. Liquidity Financing will collect the receivables. The receivable records are transferred to Liquidity Financing on August 15, 2020. Liquidity Financing assesses a finance charge of 2.5% of the amount of accounts receivable and also reserves an amount equal to 5.25% of accounts receivable to cover probable adjustments. Chessman prepares financial statements under ASPE.

Instructions

a. According to ASPE, what conditions must be met for a transfer of receivables to be accounted for as a sale?

b. Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2020, for Chessman to record the sale of receivables, assuming the recourse obligation has a fair value of $6,000.

c. Finance What effect will the factoring of receivables have on calculating the accounts receivable turnover for Chessman? Comment briefly.

d. Assume that Chessman is a private enterprise and prepares financial statements under IFRS. What conditions must be met for the transfer of receivables to be accounted for as a sale?

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