Reference no: EM132750662

Question - On January 1, 2020, Caribou Explorations Limited (CEL) sold inventory costing $32,000 and, in exchange, received $6,000 cash and a $40,000 promissory note. The five-year note was repayable in equal annual instalments of $8,734 including interest at 7%. The market rate of interest for similar transactions was 7%. The first payment was due January 1, 2021. CEL has a December 31 year-end and follows IFRS. CEL uses the net method.

CEL also extends generous payment terms to its many customers. As a result, the company has accumulated a substantial portfolio of accounts receivables. To improve cash flow, the company decided to sell some of its receivables to a factor. On June 30 2020, CEL factored $300,000 of its account receivables. CEL had previously checked the creditworthiness of its customers and is, therefore, confident that only a few accounts will be uncollectible. Therefore, the company chose to factor these receivables with recourse. In exchange for these receivables, the factor paid CEL $0.96 on each dollar of receivables on the date of transfer. In addition, the factor held $0.08 on each dollar for potential uncollectible accounts. CEL estimates that the recourse obligation has a fair value of $8,000.

(a) Form the journal entry on the books of CEL to record the sale of the inventory on January 1, 2020, receipt of the first instalment payment on January 1, 2021, and accrued interest for 2021.

(b) Form the journal entry on the books of CEL for the transfer of the receivables with recourse on June 30, 2020.