Logitech Corporation transferred $200,000 of accounts receivable to a local bank

Question

Logitech Corporation transferred $200,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 90% of the factored amount to Logitech and retains the remaining 10%. When the bank collects the receivables, it will remit to Logitech the retained amount less a fee equal to 3% of the total amount factored. Logitech estimates a fair value of its 10% interest in the receivables of $18,000 (not including the 3% fee).

What is the effect of this transaction on the company’s assets, liabilities, and income before income taxes?

Assets (decreased by __, increased by __, or no change)

Liabilities (decreased by __, increased by __, or no change)

Income before Income Taxes (decreased by __, increased by __, or no change)

Logitech Corporation transferred $200,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 90% of the factored amount to Logitech and retains the remaining 10%. When the bank collects the receivables, it will remit to Logitech the retained amount less a fee equal to 3% of the total amount factored. Logitech estimates a fair value of its 10% interest in the receivables of $18,000 (not including the 3% fee).

What is the effect of this transaction on the company’s assets, liabilities, and income before income taxes?

Explanation / Answer

Solution:

Cash increases by (200000*.9).........................................180000

Receiavable from factor increase by (18000-6000)...............12000

Account receivable decrease ............................................(200000)

Assets decrease by............................................................(8000)

Liabilities would not change as a result of this transaction.

Income beffore income tax would decrease by 8000(the loss on sale of receivables)

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