Final answer:
To record the transaction of factoring receivables with recourse where Sun Inc. factors $2,000,000, deducts a finance charge of 3%, retains $200,000 due from factor, and estimates a $100,000 recourse liability, the necessary entry will involve debiting cash, due from factor, loss on sale of receivables, and recourse liability.
Step-by-step explanation:
The student's question pertains to a factoring of accounts receivable with recourse transaction in accounting. In the given scenario, Sun Inc. is selling $2,000,000 of its accounts receivables to a finance company, which is charging a 3% finance charge and retaining 10% as 'due from factor'. Additionally, Sun Inc. estimates the fair value of the recourse liability at $100,000.
The journal entry to record this transaction would be:
- Debit Cash $1,700,000
- Debit Loss on Sale of Receivables (or Finance Charge Expense) $60,000
- Debit Due from Factor $200,000
- Debit Recourse Liability $100,000
- Credit Accounts Receivable $2,000,000
This entry reflects the reduction of the accounts receivable, the costs associated with the transaction, and the liability Sun Inc. retains due to the recourse arrangement.