JFK Corp factors $ 300,000, of accounts receivable with LBJ Finance Corporation

Question

JFK Corp factors $ 300,000, of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2014. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1.5 % of the amount of accounts receivable and retains an amount equal to 4 % of accounts receivable to cover sales discounts, returns and allowances. The transaction is to be recorded as a sale.

Instructions :

Prepare the journal entry on July 1, 2014, for JFK Corp to record the sale of receivables without recourse.

Prepare the journal entry on July 1, 2014, for LBJ Corp to record the purchase of receivables without recourse.

Explanation / Answer

July 1

      Cash                                            $ 283,500

      Due from Factor                       $    12,000 */

      Loss on Sale of Receivables    $      4,500 **/

                              Accounts Receivable                      $ 300,000

                * /($12,000 = 4% X $300,000)

                   **/ ($4,500 = 1 1/2% X $300,000)

July 1

    Accounts Receivable              $ 300,000

                          Due to JFK Corp.                               $    12,000

                          Financing Revenue                        $   4,500

                          Cash                                                  $   283,500

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