Reference no: EM133175203
Question - Air Inc. is a global airline, based in Canada. In 2020, Air Inc. made significant adjustment to its network and operations due to the widespread impact of Covid-19 and the related travel restrictions. Consequently, demand for air travel was significantly reduced. On January 1, 2021, to help support various payment requirements and operating activities, Air Inc. decided to sell $2,000,000 worth of accounts receivable to Line Inc., at a factoring charge of 2%. The terms of the contract stipulate that Line Inc. is to collect the principal and interest payments directly from customers. However, any credit losses are to be absorbed by Air Inc. (The fair value of this recourse liability is $50,000). In addition, Line Inc. withheld $60,000 from the proceeds and will pay it to Air Inc. three months later. On January 1, 2021, when the transaction was completed, Line Inc. retained full rights to pledge, sell, or transfer the receivables to third parties. Air Inc. bases its fiscal year on the calendar year.
Required -
1) If Air Inc. follows ASPE, explain how this transfer of receivable should be treated by the company? Explain why.
2) If Air Inc. follows ASPE, prepare the journal entry required by the company for January 1, 2021.
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