Logitech Corporation transferred $195,000 of accounts receivable to a local bank

Question

Logitech Corporation transferred $195,000 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 2% of the total amount factored. Logitech estimates a fair value of its 10% interest in the receivables of $14,000 (not including the 2% fee). What is the effect of this transaction on the company’s assets, liabilities, and income before income taxes?

Explanation / Answer

Account Title Debit Credit Account affected Effect on the account 1.Cash 175500 Current asset Increase Retention money on Factoring 19500 Current asset Increase Accounts Receivables 195000 Current asset Compensating decrease (Transferring Accounts Receivables to bank) 2.Accounts Receivables(Fair value) 14000 Current asset Increase Factoring Fee2%*195000 3900 Expense Tax decrease Bad debts estimated(Plugged-in fig.) 1600 Expense Tax decrease Retention money on Factoring 19500 Current asset Decrease (Recording estimated receivables) Net effect of this transaction Incresae in expense -so, decreased income before income taxes Decrease in accounts receivables (current assets)

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