Westside Textiles decides to sell $881,650 of its accounts receivable to Cheyenne Inc. Cheyenne assesses a service charge of 3% of the amount of receivables sold.

Required:

a. Prepare the journal entry that Westside Textiles makes to record this sale.

Cash $855200.5 Dr

Loss on Sale $26449.5 Dr

Accounts receivables $881650 Cr

Explanation:

The factorization of account receivables means the selling of the accounts receivables of a firm to an outside factor firm that pays instant cash in exchange of the accounts receivables claim and factoring fees.

The factoring fees or service charge is the an expense of factorization and is recorded as a loss on factorization or loss on sale.

The amount of factorization fees = 881650 * 0.03 = 26449.5

The cash received from selling the accounts receivable claim is 881650 - 26449.5 = 855200.5

The sale would mean writing off the accounts receivables from the books and a credit to the accounts receivables.