Using Accounts Receivable to Achieve Off-Balance-Sheet Financing

question 79

Essay

Using accounts receivable to achieve off-balance-sheet financing. Marvel Appliance Store has $100,000 of accounts receivable on its books on January 2, 2013. These receivables are due on December 31, 2013. The firm wants to use these accounts receivables to obtain financing.
a. Prepare journal entries during 2013 for the transactions in parts (i) and (ii) below:
(1) The firm borrows $100,000 from its bank, using the accounts receivable as collateral. The loan is repayable on December 31, 2013, with interest at 8%.
(2) The firm sells the accounts receivable 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 Marvel Appliance Store structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?

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Definitions:

Segment Margin

The amount of profit or loss generated by one part of a business, after accounting for the direct and indirect costs of that segment.

Financial Advantage

The benefit gained in financial terms, which could be through savings, profits, or reduced costs.

Outside Supplier

An outside supplier is an external entity that provides goods or services to a company, not tied by corporate affiliation.

Unit Product Cost

The total cost to produce one unit of a product, including direct materials, direct labor, and overhead.