Question

A company factored $40,000 of its accounts receivable and was charged a 3% factoring fee. The journal entry to record this transaction would include a:

Multiple Choice
a. Debit to Cash of $40,000 and a credit to Accounts Receivable of $40,000.
b. Debit to Cash of $38,800, a debit to Factoring Fee Expense of $1,200, and a credit to Accounts Receivable of $40,000.
c. Debit to Cash of $40,000 and a credit to Notes Payable of $40,000.
d. Debit to Cash of $41,200 and a credit to Accounts Receivable of $41,200.
e. Debit to Cash of $40,000, a credit to Factoring Fee Expense of $1,200, and a credit to Accounts Receivable of $38,800.

Answer 1

The journal entry to record the factoring of accounts receivable and the associated factoring fee involves debiting cash, debiting factoring fee expense, and crediting accounts receivable.

Step-by-step explanation:

The journal entry to record the factoring of $40,000 of accounts receivable and the associated 3% factoring fee would be as follows:

• Debit to Cash of $38,800
• Debit to Factoring Fee Expense of $1,200
• Credit to Accounts Receivable of $40,000

The factoring fee expense is recorded as a debit because it is an expense for the company. The decrease in the value of the accounts receivable is recorded as a credit.

Answer 2

Correct answer is B, Debit cash $38,800, debit factoring fee expense $1,200 and a credit of Accounts receivable of $40,000

Step-by-step explanation:

Factoring is one way to raise fund for immediate use of the company. It is a way to sell accounts receivable of the company. The above-mentioned problem is to sell accounts receivable (factored) with the corresponding factoring fee of 3% and that is $1,200 (40,000 x 3%). In effect of this fee, the company will receive cash less than the amount of its accounts receivable sold. The company will record the inflow of cash at $38,800 (40,000 - 3%) and will also recognize an expense incurred during the factoring in the amount of $1,200 and finally will credit the sold accounts receivable in the amount of $40,000.