Question

On February 1, 2020, Henson Company factored receivables with a carrying amount of $700,000 to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Henson Company for February. Assume that Henson factors the receivables on a with recourse basis. The recourse obligation has a fair value of $5,500. The total loss or expense to be reported on the income statement is

Answer 1

The loss on sale that Henson Company should report on the income statement for the factoring of receivables is calculated by adding the finance charge, the amount retained by Agee Company, and the fair value of the recourse obligation, totaling $61,500.

Step-by-step explanation:

The question is how to compute the loss on the sale of receivables that have been factored by Henson Company to Agee Company. To calculate this, you must consider the finance charge, the amount retained by Agee, and the fair value of the recourse obligation. The carrying amount of the receivables is $700,000. Agee Company charges a 3% finance charge and retains 5% of the receivables. The recourse obligation has a fair value of $5,500.

First, we calculate the finance charge by multiplying the carrying amount by the finance charge percentage:

$700,000 * 3% = $21,000.

Next, calculate the amount retained:

$700,000 * 5% = $35,000.

The sum of the finance charge and the amount retained is $21,000 + $35,000 = $56,000.

Finally, we add the fair value of the recourse obligation:

$56,000 + $5,500 = $61,500.

This $61,500 represents the total loss or expense to be reported on the income statement of Henson Company for February.

Answer 2

The correct answer is $21,000.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Receivable = $700,000

Finance charges =3% of receivable

Retains = 5% of the receivable

Fair value of recourse obligation = $5,500

Retention amount can be both refundable and Non refundable.

As there is no such information about retention amount. So, we consider it as refundable amount.

So, The loss to the company is of Finance charges only.

So, Loss = 3% × $700,000

= $21,000.