Question

Mountain High Ice Cream Company transferred $79,000 of accounts receivable to the Prudential Bank. The transfer was made without recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10%. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $6,900) less a 3% fee (3% of the total factored amount).
Required:
Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

Answer 1

Answer:

Debit Cash for $68,730; Debit Receivable from factor for $6,900; Debit Loss on sale of receivables for $3,370; and Credit Accounts receivable $79,000.

Explanation:

Factored amount = $79,000

Cash = Factored amount * (100% - Percentage of he factored amount retained - Rate of fee = $79,000 * (100% - 10% - 3%) = $68,730

Receivable from factor = $6,900

Loss on sale of receivables =  Factored amount - Cash - Receivable from factor = $79,000 - $68,730 - $6,900 = $3,370

The journal entry will therefore look as follows:

Details                                        Debit ($)               Credit ($)          

Cash                                            68,730

Receivable from factor                6,900

Loss on sale of receivables         3,370

  Accounts receivable                                              79,000

(To record factoring of accounts receivable.)