Question

Blossom Furniture factors $710000 of receivables to Blue Spruce Factors, Inc. Blue Spruce Factors assesses a 2% service charge on the amount of receivables sold. Blossom Furniture factors its receivables regularly with Blue Spruce Factors. What journal entry does Blossom make when factoring these receivables?

Answer 1

Answer:

Debit : Accounts Receivables : $695,800

Debit : Service Charge Expense : $14,200

Credit : Sales : $710,000

Explanation:

Factoring is a process by which a business sells its accounts receivables to a third party (factor) at a particular discount or service charge. Factoring generally occurs when a business wants to meet it’s immediate cash requirements. The factoring company in this case, charges 2% service fee of $710,000 accounts receivables. In monetary terms this is : 710,000 x 2% = $14,200. This amount would be an expense incurred by the business. The double entry to record this transaction in the books of the business is as follows:

Debit : Accounts Receivables : $695,800

Debit : Service Charge Expense : $14,200

Credit : Sales : $710,000