In: Accounting
Vaughn Manufacturing factors $5900000 of its accounts receivables with recourse for a finance charge of 5%. The finance company retains an amount equal to 9% of the accounts receivable for possible adjustments. Vaughn estimates the fair value of the recourse liability at $225000. What would be recorded as a gain (loss) on the transfer of receivables?
A. |
Gain of $1051000. |
B. |
Loss of $225000. |
C. Gain of $295000. |
D. |
Loss of $520000. |
Correct answer----------(D) Loss of $520000
.
Working
Account title and explanation | Debit | Credit |
Cash | $ 5,074,000 | |
Due from Factor (5900000 x 9%) | $ 531,000 | |
Loss on disposal of receivables ((5900000*5%)+225000) | $ 520,000 | |
Accounts Receivables | $ 5,900,000 | |
Recourse liability | $ 225,000 |