Question

On February 1, 2017, Concord Corporation factored receivables with a carrying amount of $705000 to Ivanhoe Company. Ivanhoe Company assesses a finance charge of 4% of the receivables and retains 6% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Concord Corporation for February.

Assume that Concord factors the receivables on a with recourse basis. The recourse obligation has a fair value of $3500. The loss to be reported is:

A. $31700.

B. $42300.

C. $74000.

D. $28200.

Answer 1

The amount of loss on sale to be reported in the income statement of Concord Corporation for February is $63,500.

Step-by-step explanation:

To determine the loss on sale to be reported in the income statement of Concord Corporation for February, we need to calculate the proceeds from the factoring transaction and compare it to the carrying amount of the receivables.

The proceeds from the factoring transaction are calculated by subtracting the finance charge and the retained amount from the carrying amount of the receivables:

Proceeds = Carrying amount - Finance charge - Retained amount = $705,000 - (4% of $705,000) - (6% of $705,000) = $705,000 - $28,200 - $42,300 = $634,500

The loss on sale is then calculated by subtracting the proceeds from the carrying amount of the receivables and the fair value of the recourse obligation:

Loss on sale = Carrying amount - Proceeds - Fair value of recourse obligation = $705,000 - $634,500 - $3,500 = $67,000 - $3,500 = $63,500

Therefore, the amount of loss on sale to be reported in the income statement of Concord Corporation for February is $63,500.