Companies sometimes use accounts receivable as collateral in a secured borrowing or sell them to a factor. The accounting method for these types of transactions is governed by ASC 860 – Transfers and Servicing. Review all of ASC 860- 10 to answer the following questions, with a focus on the following paragraphs:
• ASC 860- 10- 05 paragraphs 14– 15
• ASC 860- 10- 40 paragraphs 4– 6 ( not 6a), 7– 11, and 15– 27
• ASC 860- 10- 55 paragraphs 18– 18B, 26– 32, 34– 41, and 45– 46
1. List the rules that govern the determination of whether these transactions would be viewed as a sale or as a secured borrowing.
2. H and Computers, Inc. engages in a transaction to transfer its receivables with recourse to JRMH, Inc. While Hand does have some continuing involvement with the receivables, it does not maintain any control over the receivables, nor does it place any restrictions on the ability of JRMH to pledge or exchange the receivables. Because Hand does not typically engage in the transfer of its receivables, the company did not think to get a true sale opinion from its attorney. However, the company is not concerned about this oversight because the company’s probability of bankruptcy is negligible. Should Hand Computers account for this transfer as a sale or as a secured borrowing? Support your answer with references to the applicable standards.
3. H and Computers, Inc. engages in a transaction to transfer its receivables with recourse to JRMH, Inc. Hand clearly meets the first and third conditions ( the isolation and effective control conditions) in ASC 860- 10- 40- 5 to treat this transaction as a sale. It also believes that it meets the second condition. However, a clause in the contract does not allow JRMH to pledge its receivables to three specific competitor companies named in the contract. Hand claims that this clause does not constrain JRMH from pledging its receivables because there are a number of other companies with which they can contract. Should Hand Computers account for this transfer as a sale or as a secured borrowing? Sup-port your answer with specific references to the applicable standards.
ABC Lending signed a loan agreement with AMRO, Inc. on January 2, 2015. AMRO is borrowing $ 500,000 for 10 years, with a stated interest rate of 7%. AMRO will make a payment of $ 71,188.75 at the end of each year. AMRO paid $ 10,000 in points to ABC Lending on January 2, 2015. In connection with this transaction, ABC Lending paid fees to a third party for loan processing. These fees were 0.5% of the loan balance. ABC Lending also paid a bonus to an employee of 1% of the loan balance. Finally, ABC paid advertising costs of $ 1,500 and incurred expenses related to the preparation of the loan documents of $ 2,000. Prepare a memo to the file regarding the correct accounting treatment for this transaction for ABC Lending. Use the Codification for support.