Question

Company A transfer $7,000 in accounts receivables to Finance Company without recourse for a 5% fee. Finance Company will immediately remit 80% of the factored receivables to Company A and retain 20%. When Finance Company collects the remaining receivables, it remits the amount, less the fee, to Company A. Company A estimates that the fair value of the retained portion of the receivables is $11,500 (ignore the factoring fee). What is the amount of loss on sales of receivables and the amount of receivable from factors to be reported, respectively, for Company A?

Answer 1

The amount of loss on sales of receivables is $2,500 (calculated as follows: $7,000 x 5% = $350 factoring fee; $7,000 - $350 = $6,650 net proceeds; $6,650 x 20% = $1,330 retained portion; $11,500 - $1,330 = $10,170 fair value of transferred portion; $6,650 + $1,330 = $7,980 total proceeds; $10,170 - $7,980 = $2,190 loss on sales of receivables).

The amount of receivable from factors to be reported for Company A is $5,320 (calculated as follows: $7,000 x 80% = $5,600 transferred portion; $11,500 - $5,600 = $5,900 fair value of retained portion; $5,600 + $5,900 = $11,500 total receivable from factors).