Question

On November 1, ABC factors $300,000 of accounts receivable with D Corporation without recourse. D will collect the receivables on a notification basis. D advances 90% of the Accounts factored to ABC initially, and assesses a finance charge of 4% of the accounts factored which will be remitted at the end of the agreement. D reserves the balance of accounts receivables factored to cover probable adjustments for sales returns and allowances. ABC does not offer any sales discounts. On November 1, after the factoring transaction has been recorded, determine the effect on ABC's assets:

A. Assets increased by $270,000

B. Assets decreased by $12,000

C. Assets decreased by $30,000

D. Assets decreased by $300,000

Answer 1

Ans: B. Assets decreased by $12,000

Before recording the factoring transactions, ABC's Assets	$300,000
After recording the factoring transactions, ABC's Assets	$288,000
Difference	$12,000
Working Notes:
After recording the factoring transactions, Assets :
Amount of Account receivables factored to D Corporation without recourse	$300,000
Less: Initial Advance made to ABC(90% of $300,000)	$270,000
Less: Finance charge payable to D Corporation(4% of $300,000)	$12,000
Amount due from D Corporation (A)	$18,000
Increase in the Cash Balance (B)	$270,000
As on 1st November, Assets of ABC after recording factoring transactions :
Total (A+B)	$288,000
Thus, On November 1 after the factoring transaction has been recorded, the effect on ABC's assets is (B) Assets decreased by $12,000