Question

Mountain High Ice Cream Company transferred $60,000 of accounts receivable to the Prudential Bank. The transfer was made without recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10%. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $5,000) less a 2% fee (2% of the total factored amount).

Required:

Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Concepts and reason

Journal entries are passed to record the transactions done by the organization. It is a systematic arrangement of transactions in accounting journal book. For each debit an corresponding credit is also given and the amount of debit and credit will always be equal while recording journal entry.

Credit sales are also called sales on account. Under credit sales goods and services are provided without exchanging cash at the point of sales and cash collection is deferred for a pre-determined period.

Companies allow sales on account for maintaining good relations with their customers and for retaining them for a longer period. Companies provide different types of discounts and incentives for early payment of sales dues to its customers.

To cover the risk of accounts receivables becoming doubtful and to meet the immediate cash requirements of the company, factoring services are often taken up by the companies.

Fundamentals

Factoring are the financial services provided by factor. These are also called debtor financing services under which funds are made available to the organizations in lieu of their accounts receivables. These services are availed by the organizations to meet their urgent financial needs or to cover the risk of increasing doubtful accounts receivables.

Factors take accounts receivable from the organizations and remit cash to them after deducting their fees and commission charges. Factoring can be done on recourse and non-recourse basis.

Calculations of loss on sale of receivable, cash received from factor and amount of receivable from factor is shown below:

The required journal entry is recorded as follows:

Ans:

Answer 2

		Debit	Credit
1	Cash	54000		=60000*(1-10%)
	Loss on sale of receivables	2200
	Receivable from factor	3800		=5000-(60000*2%)
	Accounts receivable		60000

Answer 3

General Journal	Debit	Credit
Cash	54000		=60000*90%
Loss on sale of receivables	2200		=60000-54000-3800
Receivable from factor	3800		=5000-(60000*2%)
Accounts receivable		60000
(To record the transfer of Receivables)