Question

On May 1, COVID Co. factored €800,000 of accounts receivable with Virus Co. on the basis...

On May 1, COVID Co. factored €800,000 of accounts receivable with Virus Co. on the basis that all the risks of collectability and credit losses on the purchaser. Virus Co. assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.

Required:

(a) Prepare the journal entry required on COVID Co.’s books on May 1.

(b) Assume COVID Co. factors the €800,000 of accounts receivable with Virus Co. and COVID issues a guarantee to Virus Co. to compensate for any credit losses on receivables factored. Prepare the journal entry required on COVID’s books on May 1.

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a. When liability on credit losses is of buyer it is called factoring without recourse

Non-recourse factoring journal entry
Cash 736000
Due from factor 16000
Loss on sale of receivables 48000
To accounts receivables 800000

b. When liability on credit losses is of seller, seller has to create an estimated recourse liability of the amount of estimated doubtful debts . This is called with recourse factoring

Assuming estimated doubtful dets to be 2% of receivables [Note this is only an assumption, as no amount or % is given in question]=800000*0.02=16000

Recourse factoring journal entry
Cash 736000
Due from factor 16000
Loss on sale of receivables 64000
To accounts receivables 800000
To recourse liability 16000
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
On May 1, Dexter, Inc. factored $1,600,000 of accounts receivable with Quick Finance on a without...
On May 1, Dexter, Inc. factored $1,600,000 of accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Dexter was to handle disputes concerning service and returns of purchases. Quick Finance was to make the collections, and absorb any credit losses for bad debts. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts. (d) Prepare the entry...
On July 15, Central States Corporation factored $250,000 of accounts receivable with Franklin Factors on a...
On July 15, Central States Corporation factored $250,000 of accounts receivable with Franklin Factors on a without recourse basis. Under the arrangement, Central was to handle disputes concerning service, and Franklin Factors was to make the collections, handle the sales discounts, and absorb the credit losses. Franklin assessed a finance charge of 4% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts. (2 points)             (a) Prepare the...
Lucy factored $4,000,000 of accounts receivable with Ethel on a with recourse basis on May 1....
Lucy factored $4,000,000 of accounts receivable with Ethel on a with recourse basis on May 1. (Assume the transaction meets the criteria to be classified as a sale.) Ethel assessed a finance charge equal to 1.25% of the ARs factored. Ethel retained $40,000 to cover potential sales returns. Lucy estimated her recourse liability to be $49,000. During May and June, customers returned merchandise to Lucy on $54,000 of credit sales. All of the returns related to receivables from the $4,000,000...
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with...
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with recourse on 1/1/2018. Mock Bank agreed to collect the accounts receivable after the transaction, assessed a finance charge of 2% of the amount transferred and withheld an amount equal to 3% of the amount to cover probable uncollectible accounts. Randy prepared financial statements under ASPE. Assume the transaction qualified for the sale of receivables treatment. The recourse obligation had a fair value of $3,000....
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with...
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with recourse on 1/1/2018. Mock Bank agreed to collect the accounts receivable after the transaction, assessed a finance charge of 2% of the amount transferred and withheld an amount equal to 3% of the amount to cover probable uncollectible accounts. Randy prepared financial statements under ASPE. Assume the transaction qualified for the sale of receivables treatment. The recourse obligation had a fair value of $3,000....
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with...
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with recourse on 1/1/2018. Mock Bank agreed to collect the accounts receivable after the transaction, assessed a finance charge of 2% of the amount transferred and withheld an amount equal to 3% of the amount to cover probable uncollectible accounts. Randy prepared financial statements under ASPE. Assume the transaction qualified for the sale of receivables treatment. The recourse obligation had a fair value of $3,000....
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with...
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with recourse on 1/1/2018. Mock Bank agreed to collect the accounts receivable after the transaction, assessed a finance charge of 2% of the amount transferred and withheld an amount equal to 3% of the amount to cover probable uncollectible accounts. Randy prepared financial statements under ASPE. Assume the transaction qualified for the sale of receivables treatment. The recourse obligation had a fair value of $3,000....
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with...
To raise more liquidity, Randy Corp. factored $70,000 of its accounts receivable with Mock Bank with recourse on 1/1/2018. Mock Bank agreed to collect the accounts receivable after the transaction, assessed a finance charge of 2% of the amount transferred and withheld an amount equal to 3% of the amount to cover probable uncollectible accounts. Randy prepared financial statements under ASPE. Assume the transaction qualified for the sale of receivables treatment. The recourse obligation had a fair value of $3,000....
On May 1, 2020, Blossom factored accounts receivable of $400,000 to AB Financial. The transfer was...
On May 1, 2020, Blossom factored accounts receivable of $400,000 to AB Financial. The transfer was made with recourse. Records are transferred to AB Financial who will receive all collections. AB Financial remits to Blossom 85% of the factored receivables. AB Financial retains 15% to cover it’s factoring fee (8%), which is paid at the beginning of the contract, and to provide a cushion against potential sales returns, allowances and discounts. Blossom estimates that 4% of the factored accounts receivable...
Sarasota Incorporated factored $167,400 of accounts receivable with Ivanhoe Factors Inc. on a without-recourse basis. Ivanhoe...
Sarasota Incorporated factored $167,400 of accounts receivable with Ivanhoe Factors Inc. on a without-recourse basis. Ivanhoe assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 7% of accounts receivable for possible adjustments. Prepare the journal entry for Sarasota Incorporated and Ivanhoe Factors to record the factoring of the accounts receivable to Ivanhoe. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT