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Arness Woodcrafters sells $250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be $8,000. Prepare the journal entry for Arness to record the sale

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Answer:

The Journal entry is as follows:

Cash A/c                                              Dr. $2,27,500

Loss on sale of Receivables A/c        Dr. $20,500

Due from Commercial Factor A/c       Dr. $10,000

To  Recourse liability                                                 $8,000

To Accounts Receivable                                           $2,50,000

(To record the sale)

Working notes:

Cash received :

= $250000 - Finance Charge - Amount retained (Due from factor)

= $250000 - 5% of 250000 - 4% of 250000 = 250000 - 12500 - 10000

= $2,27,000

Loss on sale of receivables :

= ($250000 × 5%) + Recourse obligation (as the factoring is with recourse)

= $12500 + 8000

= $20,800

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