Question

Wilkinson Corporation factored, with recourse, $500,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Wilkinson estimates the recourse obligation at $12,000. What amount should Wilkinson report as a loss on sale of receivables?

Answer 1

Wilkinson Corporation should report a loss of $52,000 on the sale of its accounts receivable, factoring in the finance charge of 3%, retention of 5%, and the $12,000 estimated recourse obligation.

Step-by-step explanation:

The student asked how much Wilkinson Corporation should report as a loss on sale of receivables when it factored $500,000 of accounts receivable with Huskie Financing, with a finance charge of 3%, a retention of 5% to cover potential sales discounts, returns, and allowances, and an estimated recourse obligation of $12,000. To calculate the loss on the sale, we need to consider the finance charges, the amount held back (retained amount), and the recourse obligation. The calculation is as follows:

• Finance charge: $500,000 × 3% = $15,000
• Retention amount: $500,000 × 5% = $25,000
• Recourse obligation: $12,000

The total reduction of the receivables due to these three factors is $15,000 + $25,000 + $12,000 = $52,000. Since this amount represents the cost to the company for factoring the receivables, it is recorded as a loss on the sale of the receivables.

Therefore, Wilkinson Corporation should report a loss of $52,000 on the sale of its receivables to Huskie Financing.