Question

ervis sells $75,000 of its accounts receivable to Northern Bank in order to obtain necessary cash. Northern Bank charges a 5% factoring fee. What entry should Jervis make to record the transaction?

Answer 1

Answer:

Debit Cash account      $71,250

Debit Factoring charge   $3,750

Credit Accounts receivable  $75,000

Explanation:

Factoring accounts receivable involves the sale of the account receivable to another party such that the debt is now payable to that party. This is usually done to ease liquidity and at a charge.

When receivables are factored,

Debit Cash account

Debit Factoring charge

Credit Accounts receivable

Charge on factoring =  5/100 × $75,000

= $3,750

Amount to be received = $75,000 - $3,750

= $71,250