Brief Exercise 7-15 Factoring of accounts receivable [LO7-8) Logitech Corporatio

Question

Brief Exercise 7-15 Factoring of accounts receivable [LO7-8) Logitech Corporation transferred $105,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 85% of the factored amount to Logitech and retains the remaining 15%, 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 15% interest in the receivables of $11,500 (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

Cash received=105000*85%=89250
Receivable from factor increases by 11500-(2%*105000)=9400
Account receivable decrease by 105000
Net decrease in assets=-105000+9400+89250=-6350
There is no chnage in laibilites
Income before tax decreases by 6350

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