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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On December 1, Newton Enterprises sells $100,000 of accounts receivable to a factor without recourse, receives 85% of the value of the factored accounts, and is charged a 10% commission on the gross amount of the factored accounts receivable. Newton normally factors its accounts receivable. Prepare Newton’s journal entry.

To determine

Prepare journal entry to record the given transaction.

Explanation

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Prepare journal entry to record the given transaction.

DateAccount Title and ExplanationDebitCredit
 Cash (2)75,000 
 Factory expense (1)15,000 
 Receivables from factor(3)10,000 
      Accounts receivable 100,000
 ( To record sale of  receivables to the  factor)  

Table (2)

  • Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $75,000.
  • Factory expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the factory expense by $15,000.
  • Receivables from factor are an asset and there is an increase in the value of asset. Hence, debit the receivables from factor by $10,000.
  • Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable by $100,000.

Working notes:

(1) Calculate the factory expense.

Factory expense = Sales made ×Percentage of  commission =$100,000×$10%=$10,000

(2) Calculate the cash to be received during the year 2019

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