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Mountain High Ice Cream Company transferred $80,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $7,000). Mountain High anticipates a $5,000 recourse obligation. The bank charges a 2% fee (2% of $80,000), and requires that amount to be paid at the start of the factoring arrangement.

Required:
Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

Answer :

Answer:

The answer is "$70,400 and  $7,600"

Explanation:

Given:

Debit Cash[tex]=\$70,400[/tex]

Debit Loss on Sale of Receivables[tex]= \$7,600[/tex]

Debit on receivable from Factor[tex]= \$7,000[/tex]

Credit on the recourse liability[tex]= \$5,000[/tex]

Credit on receivable accounts[tex]= \$80,000[/tex]

 [tex]\to (2\% \ of \ \$80,000) = 1,600[/tex]

Calculating the Debit cash:

[tex]\to (80,000 \times 0.90) - (80,000 \times 0.02) \\\\\to 72,000-1,600\\\\\to 70,400[/tex]

Calculating the Debit Loss on Sale of Receivables:

[tex]\to (5,000 + 80,000) - (70,400 + 7,000) \\\\\to 85,000 - 77,400 \\\\\to 7,600[/tex]

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