https://file.aiquickdraw.com/mathbot/file/17308687742691mwdyfdk.jpg

Based on the problem shown in the image, we are dealing with the factoring of accounts receivable without recourse. Here’s the breakdown and the steps needed to prepare the correct journal entry:

### Information Provided:
1. **Total Accounts Receivable** factored: $78,000.
2. **Amount remitted by Prudential Bank**: 90% of $78,000 = $70,200.
3. **Retained amount**: 10% of $78,000 = $7,800.
4. **Estimated Fair Value of Retained Amount**: $6,800.
5. **Fee charged by the bank**: 2% of $78,000 = $1,560.

### Required Journal Entry Explanation:
The journal entry should reflect:
- The **cash received** from the factor (Prudential Bank).
- A **loss on the sale of receivables** if there’s any shortfall (e.g., the fee).
- A **receivable from the factor** for the retained amount adjusted by the estimated fair value.
- A **credit to accounts receivable** to remove the factored receivables from Mountain High’s books.

### Journal Entry:
1. **Cash**: Debit $70,200 (90% remittance from the factor).
2. **Loss on Sale of Receivables**: Debit $1,560 (the 2% fee).
3. **Receivable from Factor**: Debit $6,800 (the retained amount at estimated fair value).
4. **Accounts Receivable**: Credit $78,000 (to remove the receivables from Mountain High's books).

### Journal Entry Solution:
| No | Event                       | General Journal          | Debit   | Credit  |
|----|------------------------------|--------------------------|---------|---------|
| 1  | Cash                         | Cash                     | 70,200  |         |
| 2  | Loss on Sale of Receivables  | Loss on sale of receivables | 1,560   |         |
| 3  | Receivable from Factor       | Receivable from factor   | 6,800   |         |
| 4  | Accounts Receivable          | Accounts receivable      |         | 78,000  |

This should satisfy the requirements of the journal entry for factoring accounts receivable without recourse.

Would you like further details or have any questions?

Here are some related questions for deeper understanding:
1. What is the difference between factoring with recourse and without recourse?
2. How is the retained amount determined and accounted for in factoring transactions?
3. Why does factoring involve a "loss on sale" entry?
4. How does the estimated fair value affect the receivable from the factor?
5. How would this entry change if the factoring was with recourse?

**Tip:** Always ensure to adjust for any fees and retained amounts when preparing journal entries for factoring to accurately reflect the cash received and other assets involved.

Mountain High Ice Cream Company transferred $78,000 of accounts receivable to the Prudential Bank. The transfer was made without recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10%. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $6,800) less a 2% fee (2% of the total factored amount). Required: Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

Learn how to prepare a journal entry for factoring accounts receivable without recourse with a detailed example. Mountain High Ice Cream Company factors $78,000 in receivables with a 2% fee, a 90% remittance, and an estimated fair value of retained earnings. Suitable for undergraduate accounting students.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation