Question

Mini Corporation factored, with recourse, $600,000 of accounts receivable with Huskie Financing. The agreement met all three conditions to be considered an outright sale. Huskie advanced 92% of the amount factored and retained the remainder to cover a 3% finance fee (to be remitted at the end of the agreement) and any sales returns/allowances/discounts. The recourse obligation is estimated to be 2.4% of accounts factored. Mini estimates the fair value of the final 8% of the receivables factored to be $43,000.
Determine the effect of this transaction on Mini’s financial position: (Use I for increased; D for decreased; or NE for No Effect. If there is an Effect, state the dollar amount. Indicate the letter first, then the number. Do not space between the letter and number. Do not use commas. For example, if your answer is "Decreased by $4,000", enter D4000).



ASSETS

LIABILITIES

EQUITY

BLANK 1

BLANK 2

BLANK 3

Answer 1

Answer:

Assets:

Cash (600,000x92%)  I552000

Due from factor I18000

Accounts receivable D600000

Liabilities:

Recourse obligation I14400                              

Equity:

Loss on sale of receivable D44400

Explanation:

First, we have to calculate Loss on Sale of Receivable

Accounts receivable factored                                      600,000

Finance charge (8% -3%)                                                        5%

Finance charge on receivables (600,000 x 5%)           30,000

Hold back (%)                                                                          3%

Due from factor (600,000 x 3%)                                     18,000

Recourse obligation (600,000 x 2.4%)                           14,400

Loss on Sale of Receivable (30,000 + 14,400)               44,400

Now, we show the effect of factoring:

-------------------------------------------------------------------------------------------------------------------------------------------------------

Assets                                              Liabilities                                  Equity

--------------------------------------------------------------------------------------------------------------------------------------------------------

Cash (600,000x92%)  I552000    Recourse obligation I14400  Loss on sale of receivable  D44400

Due from factor           I18000

Accounts receivable   D600000

Hope this helps!