Factoring receivables is beneficial to a seller for all of the following reasons except:

Factoring receivables is beneficial to a seller for all of the following reasons except: Allows firms to receive cash earlier. Passes ownership of the receivables to the factor. There are no fees for factoring. Seller avoids the cost of billing and accounting for receivables. May transfer the risk of bad debts to the factor.

Allows firms to receive cash earlier.

Passes ownership of the receivables to the factor.

There are no fees for factoring.

Seller avoids the cost of billing and accounting for receivables.

May transfer the risk of bad debts to the factor.

MacKenzie Company sold $180 of merchandise to a customer who used a Regional Bank credit card. Regional Bank deducts a 4% service charge for sales on its credit cards. MacKenzie electronically remits the credit card sales receipts to the credit card company and receives payment in approximately 5 days. The journal entry to record this sale transaction would be:

Debit Cash of $180 and credit Sales $180.

Debit Cash of $180 and credit Accounts Receivable—Regional $180.

Debit Accounts Receivable—Regional $172.80; debit Credit Card Expense $7.20 and credit Sales $180.

Debit Cash $172.80; debit Credit Card Expense $7.20 and credit Sales $180.

Debit Cash $172.80 and credit Sales $172.80.

Answer

General guidance

Concepts and reason
The concepts used to answer this question are factoring and transaction.

Factoring: It is a process by which the company sells its current assets for example accounts receivable to a third part in order to fulfill its cash needs. The third party takes all the risks related to the accounts receivable and in turn charges some fees.

Transaction: It is an agreement which creates a legal obligation between two or more parties for exchanging the goods or providing the services. The transactions which can be measured in money are to be recorded in financial books.

Fundamentals

Journal Entry: It refers to an entry in the journal. It is a way to record the accounting transactions in a chronological way that is when the transaction occurs.

Account Receivable: The term accounts receivable can be defined as the amount of money that a business has yet not received from its clients. When a business provides any service or product on credit for which payment is due but yet not received, the cash due to the business becomes an account receivable. Accounts receivable is a major aspect of cash flow. It shows how a business is making its sales.

Sales: Sale of any goods or services can be made on cash or credit basis. The amount receivable on sale can either be received immediately in cash or such a payment can be received at some future date. In case of sale is being made on credit basis the company maintains an account of such customer in its books as Debtor or Accounts Receivable.

Cash on hand: It generally comprises of the cash or currency available with a business entity at a particular time which is used for carrying out day to day business activities and expenditures.

Step-by-step

Step 1 of 4

In the arrangement of factoring the cash is received earlier and it is one of the reason it is beneficial to the seller.

In the arrangement of factoring the selling company transfers the accounts receivable to the factor and factor becomes the owner of the accounts receivables. It is one of the reason it is beneficial to the seller.

In the arrangement of factoring as the accounts receivables are transferred to the factor the seller is thus free from billing and accounting for accounts receivables. It is one of the reason it is beneficial to the seller.

In the arrangement of factoring the risk of bad debts of accounts receivables is transferred by the seller to the factor. It is one of the reason it is beneficial to the seller.

Factoring is a process by which the company sells its current assets for example accounts receivable to a third part in order to fulfill its cash needs. The third party takes all the risks related to the accounts receivable and in turn charges some fees.

The factoring arrangement allows the seller to receive the cash earlier than amount is actually due and hence the money is received in advance from the seller.

The factoring arrangement also allows the seller to transfer the ownership along with the risks and rewards to the factor. This arrangement also allows the seller to avoid managing and accounting for the accounts receivables in the future.

Step 2 of 4

In factoring arrangement the, the party who purchases the accounts receivables is called factor. The factor charges some fees from the seller for the whole agreement. This is not a benefit for the seller.

No factoring fees in involved.


The factor who purchases the accounts receivables takes all the risks that are associated with the factoring arrangement that is risks like default and charges some fees for the same.

Step 3 of 4

Calculate the amount of service charge as shown below.

Service charge = Sales amount Service charge
= $180 x 4%
4
= $180x
100
= 7.2

The service charge amount is $7.2

The service charge amount is calculated by multiplying the charge percentage to the amount of total sales.

Step 4 of 4

B
C D
1 Date Accounts and Title Debit Credit
Accounts receivable $172.80
Credit card expenses | $7.20
Sales
$180
(To record t

B
C D
1 Date Accounts and Title Debit Credit
Accounts receivable $172.80
Credit card expenses | $7.20
Sales
$180
(To record t


The sales that is made is on credit as the company receives the cash back after 5 days so the same will be recorded as credit sale and the accounts receivable will increase therefore are debited.

The bank charges 4% fee on credit card sale that is paid by the company. The same in an expense for the company and hence is debited as the expenses are debited.

As the cash is not received and the sales are on credit the credit sales account is credited with the total amount of $180.

Answer

No factoring fees in involved.

B
C D
1 Date Accounts and Title Debit Credit
Accounts receivable $172.80
Credit card expenses | $7.20
Sales
$180
(To record t

Hottest videos

Leave a Reply

Your email address will not be published.

Related Posts