On June 1 2009, ABC sold an accounts receivable in the amount of $200,000 to XYZ bank for $190,000. The sale is "with recourse". ABC estimates that the fair value of the recourse obligation is $12,000. Provide the journal entry for the sale of the receivable in the books of ABC
To provide the journal entry for the sale of the receivable in the books of ABC, we first need to understand the concept of "with recourse" and how it affects the accounting treatment.
When a sale of receivable is made with recourse, it means that the seller (ABC) retains the risk of collection in case the buyer of the receivable (XYZ bank) fails to collect the amount due from the debtor. In this case, ABC estimates the fair value of the recourse obligation, which represents the potential liability they might have to fulfill if XYZ bank cannot collect the full amount.
Here's the journal entry for the sale of the receivable with recourse:
1. Record the Sale of the Receivable:
Debit: Accounts Receivable $200,000
Credit: Sales Revenue $200,000
2. Set up the Recourse Obligation:
Debit: Recourse Obligation $12,000
Credit: Estimated Liability for Recourse Obligation $12,000
3. Recognize the Proceeds from the Sale:
Debit: Cash $190,000
Debit: Loss on Sale of Receivable (plug) $2,000 ([$200,000 - $190,000 + $12,000])
Credit: Accounts Receivable $200,000
The "plug" amount represents the loss recognized on the sale, which is necessary to balance the journal entry.
It's worth noting that the Estimated Liability for Recourse Obligation account should be periodically adjusted to its fair value and any changes should be recorded through appropriate journal entries.
Remember, accounting standards may vary depending on the jurisdiction and the specific business circumstances, so consulting a professional accountant or referring to the applicable accounting standard would be beneficial for accurate record-keeping.