Question

Mitchell Company has an accounts receivable balance of $78,000 and decides to sell its receivables. Mitchell will pay a 3% fee to sell its receivables. Journalize the appropriate entry.

a. Cash 75,660
Sales discounts 2,340
Accounts receivable 78,000
b. Cash 80,340
Accounts receivable 78,000
Miscellaneous revenue 2,340
c. Cash 75,660
Service charger expense 2,340
Accounts receivable 78,000
d. Cash 78,000
Accounts receivable 78,000

Answer 1

The correct journal entry for Mitchell Company to record the sale of its accounts receivable at a 3% fee is a debit to Cash for $75,660, a debit to Service Charge Expense for $2,340, and a credit to Accounts Receivable for $78,000.

"The correct option is approximately option C"

Step-by-step explanation:

The correct journal entry for Mitchell Company selling its receivables with a 3% fee is:

• Cash 75,660
• Service charge expense 2,340
• Accounts receivable 78,000

When the receivables are sold, the accounts receivable balance is removed from the books with a debit to reduce the account balance to zero. The cash received is less than the amount of the receivables due to the service charge (3% of 78,000), which is recorded as an expense.

Journal Entry Explanation:

1. Debit Cash for the amount received (78,000 - 2,340 = 75,660) reflecting the decrease in receivables and the increase in cash.
2. Debit Service Charge Expense for 2,340 representing the fee to sell the receivables which is an expense to the business.
3. Credit Accounts Receivable for the full amount (78,000) to indicate that the receivables have been sold and no longer represent an asset to the company.