Question

Pharaoh Furniture factors $740000 of receivables to Concord Factors, Inc. Concord Factors assesses a 2% service charge on the amount of receivables sold. Pharoah Furniture factors its receivables regularly with Concord Factors. What journal entry does Pharoah make when factoring these receivables

Answer 1

Answer:  

Cash                                               $725200 Dr

Loss on Sale-Factoring                 $14800 Dr

           Accounts receivable             $740000 Cr

Explanation:

When factoring is done, the company actually sells its receivables and receives cash from the firm buying the accounts receivables. The factoring or buying firm will also charge a % fee that the selling firm will record as a loss in its accounts.

The cash received on factoring of this arrangement is 740000 * 0.98 = 725200

The loss on sale is 740000 * 0.02 = 14800

Thus the company will debit the cash that it is receiving and debit the loss on sale as it is an expense which is increasing. The accounts receivables will be credit from the books as they no longer belong to Pharaoh

Answer 2

Answer:

Debit Cash account   $725,200

Debit Factoring loss (p/l)   $14,800

Credit Accounts receivable  $740,000

Being entries to account for factored receivables.

Explanation:

Debt factoring is the process by which a company sells its receivables  to another party for cash usually at an amount lower than the accounts receivable amount. The party that purchased the debt now own then owns it and runs after the customer for settlement.

The entries required in the books of the selling party are

Debit Cash account

Debit Factoring loss (p/l)

Credit Accounts receivable

Being entries to account for factored receivables.

Factoring loss = 2% × $740,000

= $14,800

Cash received = $740,000 - $14,800

= $725,200