1) The ABC company has decided to factor its accounts receivables to XYZ company on a without recourse basis. The total amount of the AR is $425,000. XYZ will take title and collect the receivables, charging 2.5% of the total receivable as a finance charge. The two companies agree that XYZ will retain an amount equal to 5% of the receivable to cover sales returns. The transaction is to be recorded as a sale on October 1^st, 2016.

Required:

a. Prepare the entry on October 1^st for ABC to record the sale of the receivable without recourse.

b. Prepare the entry on October 1^st for XYZ to record the purchase of the receivable without recourse.

2) Suppose the transaction was to be treated on a recourse basis. Assume the fair value of the recourse obligation is $3,000.

Required:

1. Compute the net proceeds of the sale.

2. Compute the gain or loss of the transaction.

3. Prepare the journal entry for ABC to record the sale of the transaction.