Explore BrainMass
Share

Securitization and Accounts Receivable

This content was STOLEN 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 25, 2018, 9:32 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
See Also This Related BrainMass Solution

6 short answer questions for accounting.

1. How could a firm that is very profitable on its income statement find it difficult to pay its expenses (commitments) as they come due?

2. Explain how depreciation relates to income and cash flow.

3. Consider gains or losses on non-recurring asset sales. How could they mislead management and potential investors on a cash flow basis?

4. As the time period under consideration increases, how would the relationship between income and cash flow change? Compare and contrast.

5. Contrast the indirect and direct methods of cash flows. What is the particular value of each?

6. What benefit does a firm receive from securitization of assets such as accounts receivables? How does that impact the cash flow of a firm?

View Full Posting Details