g Jarvis sells $4,100 of its accounts receivable to northern bank in order to obtain necessary cash. northern bank charges a 4% factoring fee. d. Debit Cash $4,224; debit Factoring Fee Expense $176; credit Accounts Receivable $4,400 entry should Jervis make to record the transaction
When debt is sold or factored, claims on accounts receivable are transferred to a third party in exchange for quick cash. Only a specific percentage of the cash is paid to the selling company by the factoring company, who also assesses a set factoring fee.
The amount of money will receive is,
Cash = 4400 * 0.96 = 4224
Cost of factoring fees: 4400 * 0.04 = 176
Therefore, the entry to reflect such a transaction for the company selling its claims on accounts receivable is,
Factoring Fee expense 176 Dr
Cash A/c 4224 Dr
Accounts Receivable 4400 Cr
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Complete Question:
Jervis sells $4,400 of its accounts receivable to Northern Bank in order to obtain necessary cash. Northern Bank charges a 4% factoring fee. What entry should Jervis make on to record the transaction?
a. Debit Accounts Receivable $4,400; credit Cash $4,400.
b. Debit Cash $4,400; credit Accounts Receivable $4,400.
c. Debit Cash $4,576; credit Factoring Fee Expense $176; credit Accounts Receivable $4,400.
d. Debit Cash $4,224; debit Factoring Fee Expense $176; credit Accounts Receivable $4,400.
e. Credit Cash $4,224; credit Factoring Fee Expense $176; debit Accounts Receivable $4,400.
