Question

Kendall Corporation designs and manufactures sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 20X1, to improve its cash flow, Kendall establishes a securitization entity (SE) and (1) transfers without 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.

Required:

1. Prepare Kendall’s entry to record the securitization as a sale.

No.	Transaction	General Journal	Debit	Credit

2. 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).

No.	Transaction	General Journal	Debit	Credit

Answer 1

Answer:

1)

	title	Debit(in $)	Credit(in $)
20X1	cash	$24,000,000
	Acct. Receivanles		$20,5000,000
	Gain receivables		$3,500,000

In the above table, the value of the sale has recorded. Because the amount for sales has remained collected in cash. Accordingly, to show an increment in the number of current assets, the cash report has been debited. It is opposite to acct receivables and profits on the sale of receivables. The gain on the receivable is credited.

2)

	title	Debit(in $)	Credit(in $)
20X1	Cash	$24,000,000
	Loan Payable		24,000,000

In the above table, the loan acquired has recorded. the cash is debited because cash has been taken on the financing of the loan. Moreover, there will be a rise in accountability. Hence, the accountability of the loan is credited.

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