Question

Belanger Ld. reports a current ratio of 2- to- 1 in its 20X2 financial statements. The statement of Financial position shows current assets of $ 2,540,500 and current liabilities of $ 1,284,000. Accounts receivable are $ 745,900 of the current assets. Foote is considering transferring $ 440,000 of the accounts receivable with a 90- day term to a Financial institution. There are no bad debts associated with these accounts receivable. Proceeds of $ 421,200 are expected from the transaction.

Required:
1. What criteria must be met for the transfer of accounts receivable to qualify for derecognition?
2. Prepare journal entry to record the transfer as (a) a sale/ derecognition and (b) a borrowing.
3. Recalculate the current ratio reflecting first (a) and then (b) in requirement 2. 4. Why might a financial statement analyst restore transferred accounts receivable to the statement of financial position before performing a ratio analysis? What ratios other than the current ratio would be especially affected?



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  • CreatedFebruary 17, 2015
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