MLJ Company occasionally uses its accounts receivable to obtain immediate cash. At the end of June 2022, the company had accounts receivable of $500,000. MLJ needs approximately $400,000 to capitalize on a unique investment opportunity. On July 1, 2021, a local bank offers MLJ the following two alternatives:

a Borrow $400,000 at 12% interest and pledge $500,000 in accounts receivables as collateral. Additionally, MLJ was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of July, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest.

b Transfer $450,000 of specific receivables to the bank without recourse. The bank will immediately remit 90% of the factored receivables to MLJ, and retain 10%. The bank will charge a 2% factoring fee on the amount of receivables transferred. When the bank collects the remaining receivables, it remits the amount, less the 2% fee, to MLJ. MLJ estimates that the fair value of the final 10% of the receivables is $25,000. The bank will collect the receivables directly from customers. The sale criteria are met.

Required:

1. Prepare the journal entries for MLJ Company that would be recorded for each of the alternatives.

Scenario a:

Scenario b:

2.How would the entry in scenario b change if the agreement was made with recourse and MLJ estimated a recourse obligation of $5,000