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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Researching GAAP

Situation

Hamilton Company operates in an industry with numerous competitors. It is experiencing a shortage of cash and decides to obtain money from a large bank by using some of its receivables as collateral. Hamilton pledges 5100,000 of its receivables, is charged a 12% fee on this amount, and notifies these credit customers to make their payments directly to the bank. Hamilton transfers the receivables to the bank, and the bank assumes the servicing activities, but Hamilton is responsible for all bad debts which it reasonably estimates to be 2% of the receivables amount. When the balance of the receivables pledged is reduced to $3,000, Hamilton is required to “repurchase” the receivables, notify the remaining credit customers to make payments to it, and reassume the servicing activities. The bank has the right to sell the receivables, except to Hamilton’s major competitor. Hamilton’s president has asked you how to account for (and record) this transaction.

Directions

Research the related generally accepted accounting principles and prepare a short memo to the president that answers his question. Cite your reference and applicable paragraph numbers.

To determine

Examine the related generally accepted accounting principles and draft a memo to the president.

Explanation

Generally Accepted Accounting Principles (GAAP): These are the guidelines necessary to create accounting principles for the implementation of financial information reporting.

Memo

From

ABC

To

The president,

Company H

Re:  “Related generally accepted accounting principles and the accounting of the transaction”.

I have researched the issue, regarding the manner in which the company H must account for the $100,000 receivables vowed as collateral for a loan. As per, FASB ASC 860-10-40-5, financial assets transferred wherein the transferor has surrendered control upon the financial assets could be accounted as a sale. The transferor has surrendered the control, only if following conditions are met;

  1. 1. The assets transferred must be isolated from Company which means that, it has to be put beyond its reach.
  2. 2. The right to pledge the transferred assets should be obtained by transferee.
  3. 3. Transferor does not maintain actual control over the transferred assets by an agreement in which it can purchase the transferred assets before its maturity.

According to FASB ASC 860-10-40-18, a prohibition of the sale of the assets to the transferor’s competitor will not oblige the transferee, if other potential buyer persists.

According to FASB ASC 860-20-40-1B, the transferor can “remove assets sold from its accounts, realise liabilities incurred (if any), recognize proceeds received, and identify any gain or loss on the sale, if the transfer is accounted as a sale”.

According to FASB ASC 860-30-25-2, the transfer can account for the transfer as a secured borrowing with a pledge of collateral, if a transfer of financial assets does not meet the standards for a sale.

Based on the above findings, I prefer that Company H must state the transaction as a sale. My conclusions depend on the following facts;

  1. 1. Company H transferred the receivables to the bank...

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