Question

Pimento & Cheese Sandwich Shoppe transferred $80,000 of accounts receivable to the Augusta Bank. The transfer was made with recourse. Augusta remits 80% of the factored amount to Pimento & Cheese and retains 20% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Pimento & Cheese the retained amount (which Pimento & Cheese estimates has a fair value of $12.000). Pimento & Cheese anticipates a $6,000 recourse obligation. The bank charges a 4% fee (4% of $80,000), and requires that amount to be paid at the start of the factoring arrangement. Required: Prepare the journal entries.

Answer 1

In the above given question, seller Pimento & Cheese Sandwich Shoppe is selling its $ 80,000 (factored amount) accounts receivable to buyer Augusta Bank (Factor).

Journal entries in the books of Pimento & Cheese Sandwich Shoppe

Cash A/c Dr. $ 64,000 -

Due from Factor A/c (Augusta Bank) Dr. $ 12,800 -

Loss on Factoring A/c Dr. $ 9,200 -

To Accounts Receivable A/c Cr. - $ 80,000

To Recourse Liability A/c Cr. - $ 6,000

[Being an entry for sale (factoring) of accounts receivable]

Note: Please find below the workings for calculated amounts shown in the above journal entry:

1) Cash A/c: 80% of accounts receivable (factored amount) i.e. 80,000 x 80% = 64,000 as given in the question.

2) Loss on Factoring A/c: 4% fee of 80,000 (factored amount) charged by Augusta Bank i.e. 80,000 x 4% = 3,200 plus recourse obligation of 6,000 estimated by Pimento & Cheese Sandwich Shoppe. Total 9,200 (3,200 + 6,000)

3) Accounts Receivable A/c: 80,000 given in the question.

4) Recourse Liability A/c: 6,000 as estimated by Pimento & Cheese Sandwich Shoppe in the question

5) Due from Factor A/c: 12,800 is the balancing figure in the above journal entry.

Journal entries in the books of Augusta Bank (Factor)

Accounts Receivable A/c Dr. $ 80,000 -

To Due to Pimento & Cheese A/c Cr. - $ 12,800

To Financing Revenue A/c Cr. - $ 3,200

To Cash A/c Cr. - $ 64,000

[Being an entry for purchase (factoring) of accounts receivable]

Note: Please find below the workings for calculated amounts shown in the above journal entry;

1) Accounts Receivable A/c: 80,000 given in the question.

2) Due from Pimento & Cheese A/c: 12,800 is the balancing figure in the above journal entry.

3) Financing Revenue A/c: 3,200 is the 4% fee of 80,000 (factored amount) charged by Augusta Bank i.e. 80,000 x 4% = 3,200

4) Cash A/c: 80% of accounts receivable (factored amount) i.e. 80,000 x 80% = 64,000 as given in the question.