Kendall Corporation designs and manufacturers sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 2017, 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 hunderds 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. 2. Show how your answer to requirement 1 would change if control over the receviables is not surrendered at the time of the tansfer (i.e., an agreemnt exists whereby Kendall would be forced to absorb significant losses associated with the SE's receivables).
Kendall Corporation designs and manufacturers sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 2017, 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
Required:
1. Prepare Kendall's entry to record the securitization as a sale.
2. Show how your answer to requirement 1 would change if control over the receviables is not surrendered at the time of the tansfer (i.e., an agreemnt exists whereby Kendall would be forced to absorb significant losses associated with the SE's receivables).
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