Question

Tamarisk Furniture factors ( $ 640,000 ) of receivables to Pronghorn Factors, Inc. Pronghorn Factors assess a 2% service charge on the amount of receivables sold. Tamarisk Furniture factors receives ( $ 600,000 ) in cash from Pronghorn Factors.

Answer 1

The question is about the accounting practice of factoring receivables, where Tamarisk Furniture is selling its receivables to a factor. The calculation involves determining the service charge and the actual cash received by Tamarisk Furniture after the service charge is deducted.

Step-by-step explanation:

The question relates to the accounting practice of factoring receivables, which is a financial activity where a business sells its accounts receivable to a third party (factor) at a discount. In this scenario, Tamarisk Furniture sells its receivables worth $640,000 to Pronghorn Factors with a 2% service charge. We are asked to calculate how much cash Tamarisk Furniture receives and record the transaction.

Here is the calculation for the cash received:

• Service Charge: $640,000 × 2% = $12,800
• Cash Received: $600,000 (given)
• Therefore, the actual cash received already has the service charge deducted.

The initial amount of receivables minus the service charge equals the cash received. This calculation is often made in the financing activities of a company, an important part of financial operations.