Question

On October 1, 2016, Beane Company sells (factors) $600,000 of receivables to Milago Factors, Inc. Milago assesses a service charge of 4% of the amount of receivables sold. The journal entry to record the sale by Beane will include

Answer 1

The journal entry for Beane Company after selling its receivables to Milago Factors, Inc. will debit Cash and Service Charge Expense, and credit Accounts Receivable, reflecting the cash received and the service charge on the sale.

Step-by-step explanation:

The question revolves around accounting practice related to the sale of receivables, which is commonly known as factoring. In this scenario, Beane Company is selling its receivables to Milago Factors, Inc. for a cash consideration minus a service charge assessed by Milago. To record this transaction, Beane Company would debit 'Cash' and 'Loss on Sale of Receivables', credit 'Service Charge Expense', and credit 'Accounts Receivable'. Specifically, 'Cash' would be debited for the net amount received (96% of $600,000), 'Service Charge Expense' would be debited for the amount of the service charge (4% of $600,000), and 'Accounts Receivable' would be credited for the full amount ($600,000).

The journal entry for Beane Company would be as follows:

• Debit 'Cash' $576,000
• Debit 'Service Charge Expense' $24,000
• Credit 'Accounts Receivable' $600,000