Question

Sun Inc. factors $6,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $230,000. What would be recorded as a gain (loss) on the transfer of receivables?
Sun Inc. factors $6,000,000 of its accounts receiv
a. Loss of $230,000.
b. Loss of $1,130,000.
c. Gain of $530,000.
d. Loss of $300,000.

Answer 1

Answer:

Loss on sale of receivables = $300,000

Explanation:

Computation table:                  

Annual receivable                                       $6,000,000    

Less : Cost of Factors    

Finance(5% of Annual receivable)        $300,000    

Retention(10% of Annual receivable)        $600,000    

Net proceeds                                        $5,100,000    

Annual receivable = Net proceeds + Retention + Loss on sale of receivables

$6,000,000 = $5,100,000 + $600,000 + Loss on sale of receivables

Loss on sale of receivables = $300,000