Flint Incorporated factored $134,700 of accounts receivable with Buffalo Factors Inc. on a without-recourse basis. Buffalo assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Flint Incorporated and Buffalo Factors to record the factoring of the accounts receivable to Buffalo

Question

Mira Randall

Business

25 November, 20:03

Flint Incorporated factored $134,700 of accounts receivable with Buffalo Factors Inc. on a without-recourse basis. Buffalo assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Flint Incorporated and Buffalo Factors to record the factoring of the accounts receivable to Buffalo

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Brennen Hood · Answer 1

Answer with Explanation:

The Finance charge can be calculated as under:

Finance Charge = Accounts Receivable * Finance charge rate

Finance Charge = $134,700 * 2% = $2694

This would be accounted for as under:

Dr Finance Charge $2694

Cr Cash $2694

The 6% which 8082 (6% * $134,700) would be the possible bad debts which requires a provision:

Dr Bad Debts $8082

Cr Accounts receivable $8082

The reason is that in the non recourse factoring the factor doesn't suffers any losses due to bad debts.