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Pharoah Incorporated factored $154,700 of accounts receivable with Engram Factors Inc. on a with recourse basis. Engram assesses a 3% finance charge of the amount of accounts receivable and retains an amount equal to 5% of accounts receivable for possible adjustments. Prepare the journal entry for Pharoah to record the sale, assuming that the recourse liability has a fair value of $6,720

User Unreal
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Answer:

Cash 135,604 debit

Due from factor account: 7,735 debit

Loss on Factoring 18,081 debit

Recourse Liability 6,720 credit

Accounts Receivable 154,700 credit

--to record sales of account receivables--

Step-by-step explanation:

fee: 154,700 x 3% = 4,641

retention: 154,700 x 5% = 7,735

recourse: 6,720

The company will receive cash for the difference between his account receivable and the discount above:

154,700 - 4,641 - 7,735 - 6,720 = 135.604‬

We post the retention as an assets as latter we will recove this amount.

Then, the recourse as a liaiblity. Write-off the receivables and later, the cash receipts.

The difference will be considered a loss.

User Amila Weerasinghe
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