Chessman Corporation factors 600 000 of accounts

receivable with Liquidity Financing #1962

Chessman Corporation factors 600 000 of accounts receivable with Liquidity Financing

Chessman Corporation factors $600,000 of accounts receivable with Liquidity Financing, Inc. on
a with recourse basis. Liquidity Financing will collect the receivables. The receivable records are
transferred to Liquidity Financing on August 15, 2017. Liquidity Financing assesses a finance
charge of 2.5% of the amount of accounts receivable and also reserves an amount equal to
5.25% of accounts receivable to cover probable adjustments. Chessman prepares financial
statements under ASPE.

Instructions

(a) According to ASPE, what conditions must be met for a transfer of receivables to be
accounted for as a sale?

(b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2017,
for Chessman to record the sale of receivables, assuming the recourse obligation has a fair
value of $6,000.

(c) What effect will the factoring of receivables have on calculating the accounts receivable
turnover for Chessman? Comment briefly.

(d) Assume that Chessman is a private enterprise and prepares financial statements under
IFRS. What conditions must be met for the transfer of receivables to be accounted for as a
sale?

Chessman Corporation factors 600 000 of accounts receivable with Liquidity Financing

ANSWER
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