Question

Sun Inc. factors $600,000 of its accounts receivables on a with recourse basis for a finance charge of 4%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. The estimated fair value of the recourse liability was $7,000. Which of the following is true?

a. The loss on sale of receivable is $24,000

b. The loss on sale of receivable is $31,000

c. The loss on sale of receivable is $17,000

d. The loss on sale of receivable is $67,000

Answer 1

• Correct Answer = Option ‘a’ The loss on sale of receivables is $ 24,000

Event	General Journal	Debit	Credit	Working
1	Cash	$540,000		[Cash received]
	Loss on sale of receivables	$24,000		[Balancing amount]
	Receivables from factor	$36,000		[retained amount - Fees amount]
	Accounts receivables		$600,000	[Accounts receivables being factored]
	(to record the factoring transaction)

--Working

A	Accounts receivables factored	$600,000
B	% Amount remitted	90%
C = A x B	Cash received	$540,000
D = A - C	Amount retained	$60,000
F	Fair Value of amount retained	$7,000
G	% Fees charged	4%
H = A x G	Fees amount	$24,000