Answer:
Faeber Textile Company frequently factors its accounts receivable. During 2019, Faeber made credit sales of $100,000 to customers, under terms of 2/10, n/30. Faeber records its credit sales using gross price.
Dr Accounts receivable 100,000
Cr Sales revenue 100,000
In 2019, Faeber sold $70,000 of these receivables to a factor. The factor remitted 90% of the accounts receivable factored and charged a 12% commission on the gross amount of the factored receivables.
Dr Cash 54,600
Dr Factoring expense 8,400 (= $70,000 x 12%)
Dr Factoring receivables 7,000
Cr Accounts receivable 70,000
The factoring agreement also requires Faeber to be responsible for any cash discounts taken by customers upon payment of the factored receivables. Faeber is charged for these cash discounts upon reimbursement by the factor. During 2019, the factor collected the remaining amount of the factored receivables, minus the 2% discount on 94% of the collected receivables, and returned the balance owed to Faeber.
Dr Cash 5,684 (=$7,000 - $1,316)
Dr Sales discounts 1,316 (= $70,000 x 94% x 2%)
Cr Factoring receivables 7,000
Faeber collected the remaining amount of the unfactored accounts receivable, minus the 2% discount on 96% of the collected receivables.
Dr Cash 29,424 (= $30,000 - $576)
Dr Sales discounts 576 (= $30,000 x 96% x 2%)
Cr Accounts receivable 30,000
4% of the accounts receivable were collected at 100%, and 96% were collected at 98%.
