018 The Hollywood Lumber Company obtains financing from the Midwest Finance Comp

Question

018 The Hollywood Lumber Company obtains financing from the Midwest Finance Company by factoring (or discounting) its receivables. During June 2013, the company factored $1,000,000 of accounts receivable to Midwest. The transfer was made without recourse. The factor, Midwest Finance, remits 80% of the fa receivables and retains 20%, when the receivables are collected by Midwest, the retained amount, less a 3% fee (3% of the total factored amount), will be remitted to Hollywood Lumber. Hollywood estimates that the fair value of the amount retained by Midwest is $180,000. ctored In addition, on June 30, 2013, Hollywood discounted a note receivable without recourse. The note, which originated on March 31, 2013, requires the payment of $150,000 plus interest at 8% on March 31, 2014, Midwest's discount rate is 10%. The company's financial year-end is December 31. Required: Prepare journal entries for Hollywood Lumber for the factoring of accounts receivable and the note receivable discounted on June 30. Assume that the required criteria are met and the transfers are accounted for as sales

Explanation / Answer

General Journal Debit $ Credit $ 1 For Factoring of receivables Cash (80% × $1,000,000) 800,000 Loss on sale of receivables (to balance) 50,000 Receivable from factor ($180,000 30,000 fee) 150,000 Accounts receivable (book value sold) 1,000,000 2 For discounting of note receivable Interest receivable 3,000 Interest revenue ($150,000 × 8% × 312) 3,000 Cash (proceeds determined below) 149,850 Loss on sale of note receivable (difference) 3,150 Note receivable (face amount) 150,000 Interest receivable (accrued interest determined above) 3,000 $150,000 Face amount 12,000 Interest to maturity ($150,000 × 8%) 162,000 Maturity value -12,150 Discount ($162,000 × 10% × 912) $149,850 Cash proceeds

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