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 a 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.

Question

Quizplus · Accepted Answer

When a company factors its accounts receivable, it is essentially selling them to a third party at a discount. In this case, the factoring fee is 4% of the total accounts receivable factored, or $1,800 ($45,000 x 0.04). The company will receive cash from the factoring company, but it will be less than the total accounts receivable factored because of the factoring fee. Therefore, the journal entry will include a debit to Cash for the amount received ($45,000 - $1,800 = $43,200), a debit to Factoring Fee Expense for the factoring fee ($1,800), and a credit to Accounts Receivable for the full amount factored ($45,000). Option A is incorrect because it incorrectly records the factoring fee as a credit and overstates the amount received from factoring. Option B is incorrect because it does not record the factoring fee expense. Option D is incorrect because it overstates the amount received from factoring by not accounting for the factoring fee. Option E is incorrect because it records the transaction as a notes payable instead of a factoring transaction.

A Company Factored $45,000 of Its Accounts Receivable and Was