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Chapter 7: 10BE (page 363)

Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a without-recourse basis. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.

Short Answer

Expert verified

Interest revenue earned by Engram equals$3,000.

Step by step solution

01

Definition of Accounts Receivable

The current asset account, including the money due from the customers to whom sales were made on credit terms, is known as accounts receivable.

02

Journal Entries for Wood Incorporated

Date

Accounts and Explanation

Debit $

Credit $

Cash

$138,000

Due from factor150,000×6%

$9,000

Loss on sale of receivable150,000×2%

$3,000

Accounts receivables

$150,000

03

Journal Entries for Engram

Date

Accounts and Explanation

Debit $

Credit $

Accounts receivable

$150,000

Due to customer150,000×6%

$9,000

Interest revenue150,000×2%

$3,000

Cash

$138,000

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GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.

2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2018.

Instructions

Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.
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