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27 April, 18:52

Pharaoh Furniture factors $740000 of receivables to Concord Factors, Inc. Concord Factors assesses a 2% service charge on the amount of receivables sold. Pharoah Furniture factors its receivables regularly with Concord Factors. What journal entry does Pharoah make when factoring these receivables

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  1. 27 April, 18:55
    0
    Cash $725200 Dr

    Loss on Sale-Factoring $14800 Dr

    Accounts receivable $740000 Cr

    Explanation:

    When factoring is done, the company actually sells its receivables and receives cash from the firm buying the accounts receivables. The factoring or buying firm will also charge a % fee that the selling firm will record as a loss in its accounts.

    The cash received on factoring of this arrangement is 740000 * 0.98 = 725200

    The loss on sale is 740000 * 0.02 = 14800

    Thus the company will debit the cash that it is receiving and debit the loss on sale as it is an expense which is increasing. The accounts receivables will be credit from the books as they no longer belong to Pharaoh
  2. 27 April, 18:59
    0
    Debit Cash account $725,200

    Debit Factoring loss (p/l) $14,800

    Credit Accounts receivable $740,000

    Being entries to account for factored receivables.

    Explanation:

    Debt factoring is the process by which a company sells its receivables to another party for cash usually at an amount lower than the accounts receivable amount. The party that purchased the debt now own then owns it and runs after the customer for settlement.

    The entries required in the books of the selling party are

    Debit Cash account

    Debit Factoring loss (p/l)

    Credit Accounts receivable

    Being entries to account for factored receivables.

    Factoring loss = 2% * $740,000

    = $14,800

    Cash received = $740,000 - $14,800

    = $725,200
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