Question

On June 30, 2021, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $390,000 in accounts receivable to Dogwood Finance Company without recourse for a 4% fee. Option Two calls for Blondie to transfer the $390,000 in receivables to Dogwood with recourse. Dogwood's charges a 3% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $2,900 recourse liability. Under either option, Dogwood will immediately remit 85% of the factored receivables to Blondie, and retain 15%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 15% of the receivables is $24,500 (ignoring the factoring fee).

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

Answer 1

Solution:

1)Journal entry:

Date	Account title and explanation	Debit	Credit
31 June 2021	Cash ($390,000*85%)	$331,500
	Loss on sale of receivable	$49,600
	Received from factor($24,500 -4% of $390,000)	$8,900
	Accounts receivable		$390,000

2)Journal entry

Date	Account title and explanatin	Debit	Cedit
31 June 2021	Cash($331,000 *85%)	$331,500
	Loss on sale of receivable	$48,600
	Received from factor($24,500 - 3%of $390,000)	$12,800
	Recourse liability		$2,900
	Accounts receivable		$390,000

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