Question

On March 3, Pharoah Appliances sells $731,300 of its receivables to Western Factors Inc. Western Factors Inc. assesses a service charge of 4% of the amount of receivables sold:

A. Calculate the service charge assessed by Western Factors Inc.
B. Determine the net amount Pharoah Appliances receives after the service charge.
C. Analyze the financial impact on Pharoah Appliances.
D. Discuss the accounting treatment of receivable sales.

Answer 1

To calculate the service charge, multiply the amount of receivables sold by the service charge rate. The net amount received after the service charge is the amount of receivables sold minus the service charge. The financial impact on Pharoah Appliances is a reduced immediate cash inflow.

Step-by-step explanation:

A. To calculate the service charge assessed by Western Factors Inc., we need to multiply the amount of receivables sold by the service charge rate. The service charge rate is given as 4%, so we can calculate the service charge by multiplying $731,300 by 0.04.

B. To determine the net amount Pharoah Appliances receives after the service charge, we need to subtract the service charge from the amount of receivables sold. In this case, the net amount would be $731,300 minus the service charge calculated in part A.

C. The financial impact on Pharoah Appliances is that they receive a reduced amount of cash from the sale of their receivables due to the service charge assessed by Western Factors Inc. This reduces their immediate cash inflow.

D. The accounting treatment of receivable sales involves removing the receivables from Pharoah Appliances' books and recognizing the cash received from Western Factors Inc. as a cash inflow. This transaction would likely be recorded as a credit to accounts receivable and a debit to cash in Pharoah Appliances' accounting records.