Glebe Company accepted a credit card account receivable in exchange for $1,100 of services provided to a customer. The credit card company charges a 5% fee for handling the transaction. What effect will the collection of cash from the credit card company have on the elements of the financial statements

Question

Gisselle Watts

Business

23 May, 20:18

Glebe Company accepted a credit card account receivable in exchange for $1,100 of services provided to a customer. The credit card company charges a 5% fee for handling the transaction. What effect will the collection of cash from the credit card company have on the elements of the financial statements

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Pranav · Answer 1

As such, the effect on the elements of the financial statements are

Cash increases by $1,045 and receivable decreases by $1100 resulting in a net decrease in assets by $55.

Expense in the statement of other income increase by $55, thereby resulting in a decrease in owner's equity by the same amount.

Explanation:

This type of transaction is called factoring of receivables. When receivable are factored, the company sells the receivable to another and incurs a charge.

This is usually done to ease liquidity pressures.

The entries required on factoring

Debit Cash

Debit Factoring/interest expense

Credit Account receivable

The Factoring charge

= 5% * $1,100

= $55

Amount of cash received

= $1,100 - $55

= $1,045 (posted to cash)