Question

Arness Woodcrafters sells $250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be $8,000. Prepare the journal entry for Arness to record the sale

Answer 1

The journal entry to record the sale of receivables by Arness Woodcrafters to Commercial Factors, Inc. involves debiting cash and recourse liability and crediting accounts receivable, finance charge on recourse liability, loss due to recourse liability, and gain on sale of receivables.

Step-by-step explanation:

The journal entry to record the sale of receivables by Arness Woodcrafters to Commercial Factors, Inc. can be done as follows:

1. Debit Cash: $250,000
2. Debit Recourse Liability: $8,000
3. Credit Accounts Receivable: $250,000
4. Credit Finance Charge on Recourse Liability: $12,500
5. Credit Loss Due to Recourse Liability: $10,000
6. Credit Gain on Sale of Receivables: $245,500

Answer 2

The Journal entry is as follows:

Cash A/c Dr. $2,27,500

Loss on sale of Receivables A/c Dr. $20,500

Due from Commercial Factor A/c Dr. $10,000

To Recourse liability $8,000

To Accounts Receivable $2,50,000

(To record the sale)

Working notes:

Cash received :

= $250000 - Finance Charge - Amount retained (Due from factor)

= $250000 - 5% of 250000 - 4% of 250000 = 250000 - 12500 - 10000

= $2,27,000

Loss on sale of receivables :

= ($250000 × 5%) + Recourse obligation (as the factoring is with recourse)

= $12500 + 8000

= $20,800