Credit Union is asmall, regional financial institution with a loyal customer base. Like most financialinstitutions, Sherman has a significant portfolio of home mortgages. Because of the nature of itsoperations, the risks relating to these mortgages are geographically concentrated. To reduce thisrisk, the credit union securitized $45 million of mortgages receivable for proceeds of $40.5 million. Under the securitizationarrangement, investors in themortgage-backed securities bear the cost of any defaults on the mortgages. Sherman's only continuing involvement in the mortgages is the administration of the cash receipts and the transfer of that cash to the investors.

Requirements

a.

Should Sherman record this securitization as a sale or as a borrowingtransaction? Explain.

b.

Record the entries in Sherman's books relating to Sherman's securitization of mortgage receivables.

Requirement a. Should Sherman record this securitization as a sale or as a borrowingtransaction? Explain.

The securitization transaction should be recorded -------------- (as a borrowing transaction/ as a sale)because the risks and rewards of ownership ----------------(have/have not) been transferred from Sherman to the investors in themortgage-backed securities.

Requirement b. Record the entries in Sherman's books relating to Sherman's securitization of mortgage receivables. (Enter amounts in millions. Record debitsfirst, then credits. Explanations are notrequired.)