Textbook Problem

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.