On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

How should Moresan account for the trade accounts receivable factored on November 1, 2017? Why?

Step by step solution

01

Definition of Loss

Loss can be defined as the financial disadvantages occurring because of the short-term or long-term sale of any asset at lower than its actual cost.

02

Accounting for Trade Receivables Factored on 1 November 2017

Under accounting for trade receivables factored without resource, the business entity will debit cash with the amount receipted from factor and credit accounts receivables factored. It will also include debit of loss on sale equal to 3% of receivables factored and credit receivables from factor equal to 5% of accounts receivables factored.

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