Question

In: Accounting

The trial balance before adjustment for Sunshare Ltd. shows the following balances. Debit Credit Net sales...

The trial balance before adjustment for Sunshare Ltd. shows the following balances.

Debit Credit

Net sales K4, 300, 000

Accounts receivable 1,690,000

Allowance for doubtful accounts K21, 200

Consider the following independent situations:

1. To obtain additional cash, Sunshare factors without guarantee K250, 000 of accounts receivable with FNB. The finance charge is 11% of the amount factored.

2. To obtain a 1-year loan of K375, 000, Sunshare assigns K400, 000 of specific receivable accounts to Madison Financial services. The finance charge is 9% of the loan; the cash is received and the accounts turned over to Madison.

3. The company wants to maintain Allowance for Doubtful Accounts at 6% of gross accounts receivable.

Required

a) Discuss how the accounting for the situation in (1) above will differ with that in (2)

b). Using the data above, give the journal entries required to record situations 1 –3.

Solutions

Expert Solution

Ans-(a)

Case-1 Factoring without guarantee means that it is a case of "without recourse" hence the risk of collection moves to FNB and the charge is accounted as a loss for early realisation.

Case-2 Here Receivables are factored for loan with a margin i.e. as against 400000 loan of 375000 is received.Here the charge by factor is finance cost.25000 will be recorded as receivable from Factor as this is margin above loan.

Ans-(b)

Entry for -1

Loss on receivable = 11%*250000

Entry for -2

Interest expense = 400000*9% = 36000

Entry for -3

The current allowance stands at 21200 and AT at 1690000.

Meaning Gross receivable = 1690000 + 21200 = 1711200

Allowance required = 6% * 1711200 = 102672

Additional provision to be made = 102672 - 21200 = 81472

Journal:

ekkarill92 answered 1 year ago

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