Mountain High Ice Cream Company transferred $72,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates have a fair value of $6,200). Mountain High anticipates a $4,200 recourse obligation. The bank charges a 2% fee (2% of $72,000) and requires that amount to be paid at the start of the factoring arrangement.

Required:

Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

Question

Brice Lamb

Business

27 July, 15:34

Mountain High Ice Cream Company transferred $72,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates have a fair value of $6,200). Mountain High anticipates a $4,200 recourse obligation. The bank charges a 2% fee (2% of $72,000) and requires that amount to be paid at the start of the factoring arrangement.

Required:

Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

+2

Answers (1)

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Nolan Mullen · Answer 1

Journal Entry

Explanation:

Cash Dr, $63,360

Loss on sale receivable Dr, $6,640

Receivable from factor Dr, $6,200

To resource liability $4,200

To Accounts receivable $72,000

(Being transfer on the books of Mountain High is recorded)

Working Note : -

2% * $72,000 = $1,440

Cash = ($72,000 * 0.90) - ($72,000 * 0.02)

= $64,800 - $1,440

= $63,360

Loss on sale receivable = ($4,200 + $72,000) - ($63,360 + $6,200)

= $76,200 - $69,560

= $6,640