Jervis sells $75,000 of its accounts receivable to Northern Bank in order to obtain necessary cash.Northern Bank charges a 5% factoring fee.What entry should Jervis make to record the transaction?
A)Debit Cash $71,250; debit Factoring Fee Expense $3,750; credit Accounts Receivable $75,000
B)Debit Accounts Receivable $71,250; debit Factoring Fee Expense $3,750; credit Cash $75,000
C)Debit Cash $75,000; credit Factoring Fee Expense $3,750; credit Accounts Receivable $75,000
D)Debit Cash $71,250; credit Accounts Receivable $71,250
E)Debit Accounts Receivable $75,000; credit Factoring Fee Expense $3,750; credit Cash $71,250

Question

Quizplus · Accepted Answer

When Jervis sells $75,000 of its accounts receivable to Northern Bank, it should debit Cash for the amount it receives after factoring fees, which is $71,250 ($75,000 - 5% * $75,000). It should also debit Factoring Fee Expense for the factoring fee charged by Northern Bank, which is $3,750 (5% * $75,000). Finally, it should credit Accounts Receivable for the amount sold, which is $75,000. Therefore, the correct entry is: Debit Cash $71,250; Debit Factoring Fee Expense $3,750; Credit Accounts Receivable $75,000.

Jervis Sells $75,000 of Its Accounts Receivable to Northern Bank