Question

Maxwell Corporation factored, with recourse, $200,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Maxwell estimates the recourse obligation at $4,800. What amount should Maxwell report as a loss on sale of receivables?

Answer 1

Maxwell Corporation will report a loss of $800 on the sale of receivables, which is calculated by adding the finance charge and estimated recourse obligation, then subtracting the retention for sales services.

Step-by-step explanation:

The student has asked about the calculation of loss on the sale of receivables for Maxwell Corporation. The computation requires adding the finance charge, the estimated recourse obligation, and subtracting the retention for sales discounts, returns, and allowances from the factored amount. To calculate the loss on sale of receivables:Finance charge (3% of $200,000): $6,000Recourse obligation: $4,800Retention (5% of $200,000): $10,000Therefore, loss on sale of receivables = Finance charge + Recourse obligation - Retention. Substituting the numbers: Loss = $6,000 + $4,800 - $10,000, resulting in a total loss of $800. Hence, Maxwell should report a loss of $800 on the sale of receivables.

The loss on the sale of receivables can be calculated by subtracting the amount Maxwell received from the financing company from the carrying amount of the receivables. The carrying amount is the sum of the accounts receivable less the estimated recourse obligation. In this case, the carrying amount is $200,000 - $4,800 = $195,200. The loss on sale of receivables is $200,000 - $195,200 = $4,800.