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Question E7-21

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Intermediate Accounting (Kieso)
Found in: Page 368

Short Answer

(Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling $25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is $1,200.

Instructions

(a) Prepare the journal entry to record the sale of the receivables.

(b) Compute Jones’s accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.

The business entity incurs a loss of $2,200 on the sale of receivables.

See the step by step solution

Step by Step Solution

Definition of Creditors

The individual or business lending cash or from whom the business entity has purchased goods on credit are creditors.

Journal Entry to Record the Sale of Receivable

Date

Accounts and Explanation

Debit $

Credit $

Cash

$22,750

Due from factor

$1,250

Loss on sale

$2,200

Resource liability

$1,200

Account receivables

$25,000

Working note:

Computation of cash received:

Particular

Amount $

Accounts receivable

$25,000

Less: Due from factor

($1,250)

Less: Finance charges

($1,000)

Cash received

$22,750

Add: Due from factors

$1,250

Less: Resource liability

($1,200)

Net proceeds

$22,800

Computation of loss:

Particular

Amount $

Carrying value

$25,000

Less: Net proceeds

($22,800)

Loss on sale

$2,200

Accounts Receivables Turnover Ratio

After factoring in receivables, the turnover ratio has declined but had declined less than in the previous part. The collection of receivables is slower, but the business entity can convert them into cash.

Receivable’s turnover:

Days to collect:

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