Question

Jervis sells $4,400 of its accounts receivable to Northern Bank in order to obtain necessary cash. Northern Bank charges a 4% factoring fee. What entry should Jervis make on to record the transaction?
a. Debit Accounts Receivable $4,400; credit Cash $4,400.
b. Debit Cash $4,400; credit Accounts Receivable $4,400.
c. Debit Cash $4,576; credit Factoring Fee Expense $176; credit Accounts Receivable $4,400.
d. Debit Cash $4,224; debit Factoring Fee Expense $176; credit Accounts Receivable $4,400.
e. Credit Cash $4,224; credit Factoring Fee Expense $176; debit Accounts Receivable $4,400.

Answer 1

Answer:

Option D is the right answer.

Explanation:

The selling of debt or factoring of debt means selling of the claims to accounts receivables to a third party in return for instant cash. The factoring firm charges a certain factoring fee and only pay a certain percentage of cash to the selling company.

The amount of cash that will be received is,

Cash = 4400 * 0.96 = 4224

Factoring fee expense = 4400 * 0.04 = 176

Thus, the entry to record such a transaction for the firm which is selling its accounts receivable claims is,

Cash                                     4224 Dr

Factoring Fee expense       176 Dr

         Accounts Receivable         4400 Cr