Reference no: EM131115642
Using accounts receivables to achieve off-balance-sheet financing. Cypress Appliance store has $100,000 of account receivable on its books on January 2, 2008. These receivables are due on December 31, 2008. The firm wants to use these accounts receivables to obtain financing.
a. Prepare journal entries during 2008 for the transactions in parts (i) and (ii) below:
(i) The firm borrows $92,593 from its bank, using the accounts receivable as collateral. The loan is repayable on December 31, 2008, with interest at 8%.
(ii) The firm sells the accounts record able to the bank for $92,593. It collects amounts due from customers on these accounts and remits the cash to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Cypres Appliance Store structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?
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