Items 1 through 3 are based on the following:

Taylored Corp. factored $400,000 of accounts receivable to Rich Corp. on July 1, 2006. Control was surrendered by Taylored. Rich accepted the receivables subject to recourse for nonpayment. Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of forty-one days. The fair value of the recourse obligation is $12,000.

Taylored will receive and record cash of

  1. $385,260
  2. $357,260
  3. $365,260
  4. $377,260

Which of the following statements is correct?

  1. Rich should record an asset of $8,000 for the recourse obligation.
  2. Taylored should record a liability and corresponding loss of $12,000 related to the recourse obligation.
  3. Taylored should record a liability of $12,000, but no loss, related to the recourse obligation.
  4. No entry for the recourse obligation should be made by Taylored or Rich until the debtor fails to pay.

Assuming all receivables are collected, Taylored’s cost of factoring the receivables would be

  1. $ 8,000
  2. $34,740
  3. $42,740
  4. $14,740