Question

Pearl Corp. factors $370,000 of accounts receivable with Martinez Finance Corporation on a without recourse basis on July 1, 2020. The receivables records are transferred to Martinez Finance, which will receive the collections. Martinez Finance assesses a finance charge of 1.80% of the amount of accounts receivable and retains an amount equal to 5% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.
Required:
a. Prepare the journal entry on July 1, 2020, for Pearl Corp. to record the sale of receivables without recourse.
b. Prepare the journal entry on July 1, 2020, for Martinez Finance Corporation to record the purchase of receivables without recourse—please think through this.
c. Explain the difference between the sale of receivables with recourse as oppose to without recourse.

Answer 1

Answer: Please see explanation column for answer

Explanation: Given from the statemnent,

Cash: 370,000 - 18,500 - 6,660

=344,480

Due from Factor: 370,000 x .0.05=18,500

Loss on Sale: 370,000 x 0.018=6660

            A

SALES RECEIVABLE WITHOUT RECOURSE

Cash 344,480

Due from Factor 18,500

Loss on Sale of Receivables =6660

Accounts Receivable 370,000

PURCHASE RECEIVABLE WITHOUT RECOURSE

Accounts Receivable 370,000

   Due to Customers 18,500

   Interest Revenue 6660

   Cash 344,480

    B)

Sales, "with recourse" and "without recourse is a legal agreement document  signed by a seller and buyer of commodity that protects the right of or obligations of either parties  in determining whether a sale is a recourse sale or a without recourse sale in terms of defects or nonperformance of commodity.

Sales of Receivables  with recourse means  that the liability for  a particular asset sold will rest on the seller making he or she responsible  for the nonperformance or defect of the asset. By selling the asset, the seller  will bear the risk of the asset sold in case it turns out defective or does not perform as promised. By doing so, the buyer can  seek recourse from the seller because he has the legal right to do so, The seller of the asset is obligated to either reimburse the buyer for the asset or   replace the asset  with same value

while  

Sales Without Recourse means when liability for the asset rest on the buyer who accepts the risk associated with the asset incase the asset turns defective meaning that  The seller of the asset is under no obligation to change  or refund  the asset after purchase by buyer.