Question

Mountain High Ice Cream Company transferred $68,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $5,800). Mountain High anticipates a $3,800 recourse obligation. The bank charges a 2% fee (2% of $68,000), and requires that amount to be paid at the start of the factoring arrangement.

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

Answer 1

Entries are given below

Step-by-step explanation:

Calculations

Cash = ($68,000 x 90%) - ($68,000 x 2%)

Cash = $61,200 - $1,360

Cash = $59,840

Loss on sale = ($68,000 + $3,800) - ($59,840 +$5,800)

Loss on sale = $71,800 - $65,640

Loss on sale = $6,160

Entries

DEBIT CREDIT

Cash $59,840

Loss on sale $6,160

Receivable from factor $5,800

Recourse liability $3,800

Receivables $68,000