Question

Sheffield Furniture factors $914000 of receivables to Ivanhoe, Inc. Ivanhoe assesses a 3% service charge on the amount of receivables sold. Sheffield Furniture factors its receivables regularly with Ivanhoe Factors. What journal entry does Sheffield make when factoring these receivables?

Answer 1

Answer:

Amount of cash received = $886580

Factoring Commission = $27420

Explanation:

Amount of cash received = 914000 x 97% = 886580

Factoring Commission = 914000 x 3% =27420

Total Receivable= 886580+27420=$914000

Answer 2

Answer:

Dr Cash 886,580

Dr Factoring fees 27,420

    Cr Accounts receivable 914,000

Explanation:

In business, factoring companies purchase accounts receivables from other companies at a discount price and then they collect them earning the difference.  

There are two ways to record factoring expenses:

1. When they are relatively small (e.g. 2-3% of accounts receivable) they can be recorded as loss on sales or factoring expenses depending on the accounting procedures.
2. But sometimes they might be rather significant, e.g. 10% or more, then the loss or expense must be segregated between interest expenses, factoring fees, and bad debt expenses.

In this case, the factoring fees were $914,000 x 3% = $27,420, and didn't represent a significant cost. Therefore they can be recorded as a loss on sales or factoring fees. Since Sheffield usually does this type of transactions, in my opinion the proper record should be factoring fees.