Question

In: Accounting

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:

  1. 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.

  1. 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.

Solutions

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)

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