Lirin Inc. factors $6,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Lirin estimates the fair value of the recourse liability at $230,000. What would be recorded as a gain (loss) on the transfer of receivables?
A. Gain of $530,000.
B. Loss of $1,130,000.
C. Loss of $230,000.
D. Loss of $300,000.
Factoring of Receivables:
Accounts receivable balance is the payment receivable from the customers against the credit sales made by the company. When the company is in need of immediate funds, the receivables may be sold to a finance agency. This is known as 'factoring' the receivables.
Answer and Explanation:
The correct answer to this question is C. Loss of $230,000.
The loss on the sale of receivables = finance charge + fair value of recourse liability
= ($6,000,000 * 5%) + $230,000
= $300,000 + $230,000
The journal entry to record the sale of receivables is as follows:
|Date||Accounts and Explanation||Debit||Credit|
|Due from factor (@10% of AR sold)||$600,000|
|Loss on sale of receivables (@5% of AR sold + recourse liability)||$530,000|
|(to record sales of accounts receivable with recourse)|
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Learn more about this topic:
from Accounting 101: Financial AccountingChapter 7 / Lesson 4