Part 1: You are spending the summer working for a local wholesale furniture company, Samson Furniture, Inc. The company is considering a proposal from a local financial institution, Old Reliant Financial, to factor in Samson's receivables. The company controller is unfamiliar with the prevailing GAAP that details accounting for the transfer of financial assets and has asked you to do some research. The controller wants to make sure the arrangement with the financial institution is structured in such a way as to allow the factoring to be accounted for as a sale. Old Reliant has offered to factor in all of the company's receivables on a "without recourse" basis. Old Reliant will remit to Samson 90% of the factored amount, collect the receivables from Samson's customers, and retain the remaining 10% until all of the receivables have been collected. When Old Reliant collects all of the receivables, it will remit to Samson the retained amount, less a 4% fee (4% of the total factored amount). 1. What is the meaning of the term "without recourse?" 2. Use the FASB Accounting Standards Codification (see the Required Resources Link in Module One) to access the relevant authoritative literature on accounting for the transfer of financial assets. What conditions must be met for a transfer of receivables to be accounted for as a sale (or, in accounting terms, "derecognized")? 3. What is the specific citation that Samson would rely on in applying that accounting treatment? 4. Assuming that the conditions for treatment as a sale are met, prepare Samson's journal entry to record the factoring of $400,000 of receivables. Assume that the fair value of the last 10% of Samson's receivables is equal to $25,000. 5. An agreement that both entitles and obligates the transferor, Samson, to repurchase or redeem transferred assets from the transferee, Old Reliant, maintains the transferor's effective control over those assets, and the transfer is accounted for a secured borrowing, not a sale, if and only if what conditions are met?
