In: Accounting
Crest Textiles, Inc. factors $400,000 of accounts receivable with Commercial Factors, Inc..Crest Textiles transfers the receivable records to Commercial Factors, which will receive the collections. Commercial Factors assesses a finance charge of 2 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable for probable adjustments.
Instructions:
Factoring without recourse
In the books of Crest Textiles
Account Titles and Explanation | Debit | Credit |
Cash | 372000 | |
Loss on sale of receivables (2% x $400000) | 8000 | |
Due from factor (5% x $400000) | 20000 | |
Accounts receivable | 400000 | |
(To record sale of receivables without recourse) |
In the books of Commercial Factors
Account Titles and Explanation | Debit | Credit |
Accounts receivable | 400000 | |
Due to customer | 20000 | |
Interest revenue | 8000 | |
Cash | 372000 | |
(To record purchase of receivables without recourse) |
Factoring with recourse
In the books of Crest Textiles
Account Titles and Explanation | Debit | Credit | |
a. | Cash | 372000 | |
Due from factor (5% x $400000) | 20000 | ||
Loss on sale of receivables | 13000 | ||
Accounts receivable | 400000 | ||
Recouse liability | 5000 | ||
(To record sale of receivables with recourse) | |||
b.i. | Cash | 20000 | |
Due from factor | 20000 | ||
(To record collection on maturity) | |||
b.ii. | Accounts receivable | 435000 | |
Recouse liability | 5000 | ||
Due from factor | 20000 | ||
Cash | 420000 | ||
(To record receivable on maturity) |