Question

On November 1, ABC factors $300,000 of accounts receivable with D Corporation without recourse. D will collect the receivables on a notification basis. D advances 90% of the accounts factored to ABC initially and assesses a finance charge of 4% of the accounts factored, which will be remitted at the end of the agreement. D reserves the balance of accounts receivables factored to cover probable adjustments for sales returns and allowances. ABC does not offer any sales discounts. On November 1, after the factoring transaction has been recorded, determine the effect on ABC's assets:

a) Increase in cash by $270,000 and decrease in accounts receivable by $300,000.

b) Increase in cash by $270,000 and increase in accounts receivable by $300,000.

c) Increase in cash by $300,000 and decrease in accounts receivable by $270,000.

d) Increase in cash by $270,000 and no change in accounts receivable.

Answer 1

The correct answer is option b) Increase in cash by $270,000 and increase in accounts receivable by $300,000.

Step-by-step explanation:

The effect on ABC's assets after factoring accounts receivable with D Corporation is an increase in cash by $270,000 and decrease in accounts receivable by $300,000. When ABC factors $300,000 of accounts receivable, they receive an initial advance of 90% of the amount, which is $270,000 (90% of $300,000).

This amount is recorded as an increase in cash. Accounts receivable is decreased by the full amount factored, which is $300,000.