Question

Mountain High Ice Cream Company transferred $76,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $6,600). Mountain High anticipates a $4,600 recourse obligation. The bank charges a 2% fee (2% of $76,000), and requires that amount to be paid at the start of the factoring arrangement. Mountain High has transferred control over the receivables, but determines that it still retains substantially all risks and rewards associated with them. Required: Prepare the journal entry to record the transfer on the books of Mountain High, considering whether the sales criteria under IFRS have been met.

Answer 1

Answer:

Cash                      66,880 debit

Due from factor       7,600 debit

Loss on factoring    6,120  debit

      Accounts Receivables     76,000 credit

      Recourse Liability               4,600 credit

Explanation:

Accounts receivable factored:       76,000

Cash received 90% of 76,000    =   68,400

less bank charge fee: 76,000 x 2% = 1,520  

total:                                                   66,880

Due  from factoring = 76,000 x 10% 7,600

Recourse liability: 4600

The loss is calcualte bu difference:

The bank receives 76,000 dollars of Accounts receivables

It pays 66,880 It makes us assuma liability for 4,600

and potentially can paid up to 7,600

Net: 69,880‬

difference: 76,000 - 66,880 = 6,120