Question

Glebe Company accepted a credit card account receivable in exchange for $1,100 of services provided to a customer. The credit card company charges a 5% fee for handling the transaction. What effect will the collection of cash from the credit card company have on the elements of the financial statements

Answer 1

Answer:

As such, the effect on the elements of the financial statements are

Cash increases by $1,045 and receivable decreases by $1100 resulting in a net decrease in assets by $55.

Expense in the statement of other income increase by $55, thereby resulting in a decrease in owner's equity by the same amount.

Explanation:

This type of transaction is called factoring of receivables. When receivable are factored, the company sells the receivable to another and incurs a charge.

This is usually done to ease liquidity pressures.

The entries required on factoring

Debit Cash

Debit Factoring/interest expense

Credit Account receivable

The Factoring charge

= 5% * $1,100

= $55

Amount of cash received

= $1,100 - $55

= $1,045 (posted to cash)