Question

Mountain High Ice Cream Company transferred $79,000 of accounts receivable to the Prudential Bank. The transfer was made without recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10%. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $6,900) less a 3% fee (3% of the total factored amount).

Required:
Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

Answer 1

The journal entry for Mountain High Ice Cream Company's sale of accounts receivable to Prudential Bank includes debits to Cash for $71,100, Due from Factor for $6,900, Factoring Expense for $2,370, and a credit to Accounts Receivable for $79,000.

Step-by-step explanation:

The Mountain High Ice Cream Company has made a sale of accounts receivable to Prudential Bank without recourse, which would generally be recorded as a sale under Financial Accounting Standards. Given that 90% of the factored amount is remitted to Mountain High and a 3% fee is deducted from the retained amount, the journal entry on Mountain High's books would be as follows:

1. Debit Cash $71,100 (90% of $79,000).
2. Debit Due from Factor $6,900 (Estimated fair value of the retained amount).
3. Debit Factoring Expense $2,370 (3% factoring fee of the total $79,000).
4. Credit Accounts Receivable $79,000 (To record the transfer of receivables).

This entry reflects the initial receipt of cash, the amount due from the factor, and the factoring expense, while removing the accounts receivable from Mountain High's books.

Answer 2

Debit Cash for $68,730; Debit Receivable from factor for $6,900; Debit Loss on sale of receivables for $3,370; and Credit Accounts receivable $79,000.

Step-by-step explanation:

Factored amount = $79,000

Cash = Factored amount * (100% - Percentage of he factored amount retained - Rate of fee = $79,000 * (100% - 10% - 3%) = $68,730

Receivable from factor = $6,900

Loss on sale of receivables = Factored amount - Cash - Receivable from factor = $79,000 - $68,730 - $6,900 = $3,370

The journal entry will therefore look as follows:

Details Debit ($) Credit ($)

Cash 68,730

Receivable from factor 6,900

Loss on sale of receivables 3,370

Accounts receivable 79,000

(To record factoring of accounts receivable.)