I am writing this memo in regards to your question of how to record the transaction of transferring the company’s receivables to the financial institution. The company is doing this to get $100,000 because of the shortage in cash. The accounts receivables are being used as collateral with a charge of 12% fee on this amount and Hamilton’s is required to repurchase the receivables back from the financial institution.
In transfers of an entire receivable, a group of entire receivables, or a portion of an entire receivable with recourse, the transferor provides the transferee with full or limited recourse. The transferor is obligated under the terms of the recourse provision to make payments to the transferee or to repurchase receivables sold under certain circumstances, typically for defaults up to a specified percentage. (860-10-05-15).
This Statement requires a debtor to (a) reclassify financial assets pledged as collateral and report those assets in its statement of financial position separately from other assets not so encumbered if the secured party has the right by contract or custom to sell or repledge the collateral and (b) disclose assets pledged as collateral that have not been reclassified and separately reported in the statement of financial position. (Statement of Financial Accounting Standards, No. 140).
Usually, the amount of receivables assigned is greater than the amount of the advance. On the assignor company’s balance sheet, it reports assigned accounts receivable separately from unassigned accounts receivable because it must use cash receipts from these assigned receivables for a specific purpose. The assignor company reports the note payable as a current or noncurrent liability; depending on the due date.
The transfer of accounts receivables should be first recorded as a debit to Cash and Assignment Service Charge Expense and a credit to Notes Payable. After that you should...