Question

On May 1, Dexter, Inc. factored $1,600,000 of accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.

Instructions

1. Prepare the journal entry required on Dexter's books on May 1.
2. Prepare the journal entry required on Quick Finance’s books on May 1.
3. Assume Dexter factors the $1,600,000 of accounts receivable with Quick Finance on a with recourse basis instead. The recourse provision has a fair value of $28,000. Prepare the journal entry required on Dexter’s books on May 1.

Answer 1

(a)

JOURNAL ENTRY

IN THE BOOKS OF DEXTER

Date	Particulars	Debit (in $)	Credit (in $)
May 1	Cash A/c Dr.	1,472,000
	Finance Charge A/c ($1,600,000 X 6%) Dr.	96,000
	Due from Quick Finance A/c ($1,600,000 X 2%) Dr.	32,000
	To Accounts Receivable A/c		1,600,000
	(Being transaction recorded on without recourse basis)

(b)

JOURNAL ENTRY

IN THE BOOKS OF QUICK FINANCE

Date	Particulars	Debit (in $)	Credit (in $)
May 1	Accounts Receivable A/c Dr.	1,600,000
	To Finance Revenue ($1,600,000 X 6%)		96,000
	To Due to Dexter ($1,600,000 X 2%)		32,000
	To Cash A/c		1,472,000
	(Being transaction recorded on without recourse basis )

(c)

JOURNAL ENTRY

IN THE BOOKS OF DEXTER

Date	Particulars	Debit (in $)	Credit (in $)
May 1	Cash A/c Dr.	1,472,000
	Due from Quick Finance A/c ($1,600,000 X 2%) Dr.	32,000
	Finance Charge A/c    Dr. (($1,600,000 X 6%) + $28,000)	124,000
	To Accounts Receivable A/c		1,600,000
	To Recourse Liability A/c		28,000
	(Being transaction recorded on recourse basis)

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