Question

On June 30, 2021, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $400,000 in accounts receivable to Dogwood Finance Company without recourse for a 5% fee. Option Two calls for Blondie to transfer the $400,000 in receivables to Dogwood with recourse. Dogwood's charges a 4% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $3,000 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 10% of the receivables is $25,000 (ignoring the factoring fee).

Required:
1. Prepare any necessary journal entry or entries if receivables are factored under Option One.

Account	Balance
Debit Cash	[a]
Debit Loss on sale of receivables	[b]
[c]	[d]
[e]	[f]

2.Prepare any necessary journal entry or entries if receivables are factored under Option Two.

Account	Balance
Debit Cash	[g]
Debit Loss on sale of receivables	[h]
[i]	[j]
Credit [k] Liability	[l]
[m]	[n]

Answer 1

SOLUTION:

1. if receivables are factored under Option One.

Particulars	Debit	Credit
Cash (400000*90%)	360000
Loss on Sale of Receivables (Balancing Figure)	35000
Receivable from Factor (25000 - 5% of 400000)	5000
To Accounts Recivable		400000

2. if receivables are factored under Option Two.

Particulars	Debit	Credit
Cash (400000*90%)	360000
Loss on Sale of Receivables (Balancing Figure)	34000
Receivable from Factor (25000 - 4% of 400000)	9000
To Recource Liability		3000
To Accounts Recivable		400000