Question

The following two cases are independent:
Case A Appa Apparel manufactures fine sportswear for many national retailers and frequently sells its receivables to financing companies as a means of accelerating cash collections. Appa transferred $ 600,000 of receivables from retailers to a financing company and has no control over, or continuing interest in, the accounts receivable. The receivables were transferred without recourse on a notification basis. The financing company charged 12% of the receivables total. There were no bad debts.

Required:
1. Should Appa record the transfer of receivables as a sale/ derecognition or as a borrowing? Why?
2. Record all entries related to the transfer for Appa.
Case B Bappa Apparel manufactures fine sportswear for many national retailers and frequently sells its receivables to financing companies as a means of accelerating cash collections. Bappa transferred $ 600,000 of receivables from retailers to a financing company. The receivables were transferred with recourse on a notification basis. The financing company charged 8%. Bappa has no obligation to the financing company other than to pay the account of a retailer in the event of a default. However, Bappa retains legal control over the receivables, and the financing company may not sell the accounts receivable to a third party. There were no bad debts.

Required:
1. Should Bappa record the transfer of receivables as a sale/ derecognitionor as a borrowing? Why?
2. Record Bappa’s entries related to the transfer.



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  • CreatedFebruary 17, 2015
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