Question 1

On July 1, Year 1, Spear Co. sold $100,000 of accounts receivable to a factor with recourse. The factor assessed a 5% finance charge and retained 3% of the receivables to cover sales returns. Spear estimates the recourse liability (fair value of recourse obligation) at $2,000. The transaction meets the criteria for a sale. What amount of loss should Spear recognize on the sale?

Accepted Answer

Calculate the Net Proceeds (Cash + Due from Factor - Recourse Liab). Loss = Book Value Sold - Net Proceeds. Alternatively: Loss = Finance Charge + Recourse Liab.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Including the retention amount in the loss. Forgetting to include the recourse liability in the loss.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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