Forman Corporation extends credit to its customers to purchase appliances, furniture, and other goods. Forman Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet. Forman Corporation would then use the cash collections from the receivables to repay the bank loan with interest. Instead, Forman Corporation sells the accounts
receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased. The amount takes account of expected defaults, which would reduce the cash generated by the receivables. This difference between the amount paid to Forman Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return. Which of the following is/are true?
a. Forman Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet and recognizing bad debt expense on the income statement.
b. Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing bad debt expense on the income statement.
c. Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet.
d. Forman Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet.
e. Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet and recognizing bad debt expense on the income statement.
D
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