A company factored $45,000 of its accounts receivable and was charged a 4% factoring fee. The journal entry to record this transaction would include a:
A. Debit to Cash of $45,000, a debit to Factoring Fee Expense of $1,800, and credit to Accounts Receivable of $46,800.
B. Debit to Cash of $45,000 and a credit to Accounts Receivable of $45,000.
C. Debit to Cash of $43,200, a debit to Factoring Fee Expense of $1,800, and a credit to Accounts Receivable of $45,000.
D. Debit to Cash of $46,800 and a credit to Accounts Receivable of $46,800.
E. Debit to Cash of $45,000 and a credit to Notes Payable of $45,000.
The correct answer and explanation is :
The correct answer is C: Debit to Cash of \$43,200, a debit to Factoring Fee Expense of \$1,800, and a credit to Accounts Receivable of \$45,000.
Explanation:
In factoring, a company sells its accounts receivable to a third party (the factor) at a discount. The factor then assumes responsibility for collecting the receivables. The company receives cash immediately, but the amount of cash received is less than the face value of the receivables due to the factoring fee.
Let’s break this down step-by-step:
- Accounts Receivable: The company is factoring \$45,000 of accounts receivable. This is the total value of the receivables that will be sold to the factor.
- Factoring Fee: The factoring fee is a percentage of the total receivables. In this case, the factoring fee is 4%. To calculate the fee: $$
45,000 \times 4\% = 1,800
$$ This fee represents the amount the company has to pay to the factor for providing the service. - Cash Received: The company will receive cash equal to the total accounts receivable minus the factoring fee. Therefore, the amount of cash the company will receive is: $$
45,000 – 1,800 = 43,200
$$ - Journal Entry:
- Debit Cash for \$43,200 to reflect the cash received from the factor.
- Debit Factoring Fee Expense for \$1,800, representing the cost of factoring.
- Credit Accounts Receivable for \$45,000, removing the accounts receivable from the books because it has been sold to the factor.
Thus, the journal entry reflects the cash received, the expense related to the factoring fee, and the removal of the accounts receivable from the company’s books.