Crest Textiles, Inc. factors $400,000 of accounts receivable with Commercial Factors, Inc..Crest Textiles transfers the receivable...

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:

Presume it is a factoring without recourse. Then prepare any necessary journal entries for Crest Textiles and Commercial Factors, Inc. on the date of factoring.

Presume it is a factoring with recourse and the fair market value of the recourse is $5,000. Then prepare any necessary journal entries for Crest Textiles
1. On the date of factoring
2. On the maturity date of accounts receivable
  1. If the credit buyer of Crest Textiles pays $400,000 to Commercial Factors.
  2. If the credit buyer of Crest Textiles does not pay $400,000 to Commercial Factors and hence Crest Textiles pays $420,000 including $20,000 penalty to Commercial Factors.

Expert Solution

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)

ekkarill92 answered 3 years ago

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