Explore BrainMass
Share

Explore BrainMass

    Securitization and Accounts Receivable

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Securitization

    Kendall Corporation designs and manufactures sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 2011, to improve its cash flow, Kendall establishes a securitization entity (SE) and (1) transfers wit out recourse $20.5 million of its receivables to the SE and (2) surrenders control over these receivables. The SE then sells securities backed by the cash flows associated with Kendall's receivables. Because the SE is separate from Kendall, and the receivables are diversified across hundreds of customers, investors are willing to pay $24 million for the securities. The SE then transfers the $24 million to Kendall Corporation.

    a. Prepare Kendall's entry to record the securitization as a sale.
    b. Show how your answer to requirement 1 would change if control over the receivables is not surrendered at the time of the transfer (i.e., an agreement exists whereby Kendall would be forced to absorb significant losses associated with the SE's receivables).

    Accounts receivable
    Following is the financial statements of Buffalo Supply Company, a provider of plumbing fixtures to contractors in central Pennsylvania.
    Fiscal Years Ended October 31,
    2011 2010 2009
    From Income Statements
    Revenues $3,519,444 $3,877,135 $2,969,981 Bad debt expense 45,753 50,403 38,610
    From Balance Sheets
    Gross accounts receivable $ 345,044 $ 362,349 $ 282,855
    Less: Allowance for doubtful accounts (54,654) (74,365) $ (47,612)
    Net accounts receivable $ 290,390 $ 287,984 $ 235,243
    a. Reconstruct all journal entries pertaining to Gross accounts receivable and Allowance for doubtful accounts for the fiscal year ended October 31, 2011. Assume that all revenues are from credit sales.
    b. Do a T-account analysis of both accounts, starting with the allowance account.

    © BrainMass Inc. brainmass.com October 10, 2019, 7:20 am ad1c9bdddf
    https://brainmass.com/business/accounting/securitization-accounts-receivable-577403

    Solution Preview

    Here's #2. Let me know if you have any question.

    Securitization
    Kendall Corporation designs and manufactures sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 2011, to improve its cash flow, Kendall establishes a securitization entity (SE) and (1) transfers wit out recourse $20.5 million of its receivables to the SE and (2) surrenders control over these receivables. The SE then sells securities backed by the cash flows associated with Kendall's receivables. Because the SE is separate from Kendall, and the receivables are diversified across hundreds of customers, investors are willing to pay $24 million for the securities. The SE then transfers the $24 million to Kendall Corporation.
    a. Prepare Kendall's entry to ...

    Solution Summary

    The securitization and accounts receivables are examined. T-account analysis for both accounts are provided.

    $2.19