Question

Financing with receivables On May 1, 2018 Dewey, Inc. factored $1,425,000 of its receivables to Mullins Financing Corp. The receivables were factored without recourse. The transaction met US GAAP requirements to be accounted for as a sale. Mullins charged a factoring fee of 2.5% of the factored receivables and advanced 80% of the receivables amount to Dewey, withholding the rest to cover legitimate adjustments such as sales returns. Dewey’s controller expected that there would be approximately $150,000 in such adjustments. The withheld balance, less adjustments, will be remitted in 60 days.

1. Show the journal entry to record the sale of the receivables that was made by Dewey’s controller. The legitimate adjustments totaled $101,000.

2.Show the journal entry made on July 1 to record Dewey’s receipt of the withheld amount.

On May 2, 2018 Schneebly Company factored $863,000 of its receivables with recourse to Mullins Financing Corp. The transaction met US GAAP requirements to be accounted for as a sale. Schneebly’s receivables are considered to be of low quality so Mullins charged a factoring fee of 3.0% and advanced only 75% of the receivables amount. The recourse liability was $90,000. Scheneebly’s estimated that there would be $75,000 in legitimate adjustments such as sales returns.

3. Show the journal entry made by Schneebly’s controller to record the factoring transaction.

Answer 1

When accounts receivable are factored without recourse, the factor (purchasing institution) bears the loss resulting from bad debts. For example, if a receivable whose account has been factored becomes bankrupt and the amount due from him cannot be collected, the factor is supposed to bear the loss

1. On May 1, 2018

Cash a/c Dr 1,140,000    (1,425,000*80%)

Due from factor a/c Dr 249,375       (1,425,000*17.5%)

Loss on sale of receivables a/c Dr 35,625 (1,425,000*2.5%)

             To Accounts/Notes receivable a/c 1,425,000

2.On July 1^st

Cash a/c Dr 148,375

Loss due to legitimate adjustments a/c Dr 101,000

      To Due from factor a/c 249,375

In a factoring with recourse transaction, the seller guarantees the collection of accounts receivable i.e., if a receivable fails to pay to the factor, the seller will pay. As the recovery is guaranteed by the seller, a recourse liability is determined and recorded by him. The loss on sale of receivable is also increased by the amount of recourse liability.

3. On May 2^nd 2018

Cash a/c Dr                              647,250   (863,000*75%)

Due from factor a/c Dr           189,860   (863,000*22%)

Loss on sale of receivables a/c Dr 115,890 (863,000*3% + 90,000)

             To Accounts/Notes receivable a/c 863,000

              To Recourse Liability a/c                  90,000