Caitlin Enterprises decides to finance its operations by transferring its receivables with recourse to Larsen Financial, Inc.
Question:
Caitlin Enterprises decides to finance its operations by transferring its receivables with recourse to Larsen Financial, Inc. The provisions of the agreement bar Caitlin and its creditors from claiming the receivables. In addition, Larsen Financial has the right to use the receivables in any way it wishes, and there is no agreement for Caitlin to repurchase the receivables or to force their return. James McCabe, Caitlin’s accountant, is not sure whether this arrangement should be recorded as a sale or as a borrowing. He is aware that the FASB has issued a standard covering this situation, but he isn’t sure how this arrangement fits the standard. He approaches you, the company auditor, and asks for your opinion as to how the transaction should be recorded. He also asks you to describe how these two approaches would affect the basic financial statements.
Step by Step Answer:
Intermediate Accounting
ISBN: 978-0324312140
16th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen