Exercise: Factoring Accounts Receivable

On May 1, ABC, Ltd. factored $600,000 of accounts receivable with XYZ Finance on a without recourse basis.

Under the arrangement, ABC was to handle disputes concerning service, and XYZ was to make the collections, handle the sales discounts, and absorb the credit losses.

XYZ assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.

Instructions:

(a) Prepare the journal entry required on ABC's books on May 1.

(b) Prepare the journal entry required on XYZs books on May 1.

(c)Assume the factoring was on a with recourse basis instead. The recourse provision has a fair value of $10,000. Prepare the journal entry required on ABC books on May

Please explain the answer step by steps. Thank you!