Question

On March 3, Sunland Company sells $768,600 of its receivables to Western Factors Inc. Western Factors Inc. assesses a service charge of 5% of the amount of receivables sold. Prepare the entry on Sunland Company’ books to record the sale of the receivables. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Answer: The journals to record the sale of the receivables in Sunland Company's books are:

                                                           Debit                      Credit

Cash                                               729,600

Service charge expense                 38,400

Accounts receivable                                                     768,000

Explanation: Please note that Western Factors Inc. charges 5% of the amount of receivables sold. This means the cash transfer Sunland Company would make to western Factors Inc. would be net of the 5% service charge (5% * $768,000 = $38,400). Since Sunland is disposing the receivables, that account has to be credited. Then, the actual cash transfer would be $729,600 ($768,000 - 38,400). That is what Western Factors Inc. would now carry as its own receivables in its books.

Answer 2

Answer:

Debit Bank Account/Western Factor - $768,600

Credit All Account Receivables Sold - $768,600

Debit Factoring Expenses - $38,430

Credit Bank Account - $38,430

Explanation:

The Factoring expense is a cost and not a reduction of the receivables balance. It should be treated separately