factoring accounts rec. On May 1, Dexter, Inc. factored $1,600,000 of accounts r

Question

factoring accounts rec.

On May 1, Dexter, Inc. factored $1,600,000 of accounts receivable with Quick Finance on a without recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.

Instructions (a) Prepare the journal entry required on Dexter's books on May 1.

(b) Prepare the journal entry required on Quick Finance’s books on May 1.

(c) Assume Dexter factors the $1,600,000 of accounts receivable with Quick Finance on a with recourse basis instead. The recourse provision has a fair value of $28,000. Prepare the journal entry required on Dexter’s books on May 1

(d) Explain the main advantage and disadvantage of selling recievables (1) without recourse and (2) with recourse

Explanation / Answer

Answer a. Books of Dexter Inc. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-May Cash                                                            Dr.          1,472,000 Due from Factor                                     Dr.                32,000 $1,600,000 X 2% Loss on Sale of Receivable                Dr.                96,000 $1,600,000 X 6%    To Accounts Receivable          1,600,000 Answer b. Books of Quick Finance Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-May Accounts Receivable                            Dr.          1,600,000    To Due to Dexter                32,000 $1,600,000 X 2%    To Financing Revenue                96,000 $1,600,000 X 6%    To Cash          1,472,000 Answer c. Books of Dexter Inc. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-May Cash                                                            Dr.          1,472,000 Due from Factor                                     Dr.                32,000 $1,600,000 X 2% Loss on Sale of Receivable                Dr.              124,000 $1,600,000 X 6% + $28,000    To Accounts Receivable          1,600,000    To Recourse Liability                28,000 Answer d. With Recourse - In this method, company sells its accounts receivables with the promise that the company will buy back the uncollected accounts receivables. Main Advantage of selling receivable with recourse are: Recourse factoring is more affordable or lower finance charge. Main disadvantage of selling receivable with recourse are: Seller have to record the recourse liability. Without Recourse: In this method, company sells its accounts receivables and have no liability for the uncollected accounts receivables. Main Advantage of selling receivable without recourse are: Purchaser assume the risk of collection of receivable rather than the seller Main disadvantage of selling receivable without recourse are: Finance charges are higher than with recourse liability.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.