[JohnWayneIsGod]

Took a practice test yesterday, and am trying to get a handle on some questions that I missed. The question below is simple, as the correct answer was a credit for the receivable, but I’d like to understand the full journal entry. Is the journal entry below correct?

Taylored Corp. factors $200,000 of accounts receivable in a transaction in which control is surrendered and without recourse to Rich Corp. on July 1, year 1. Rich assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of 41 days.

Dr: Cash: 180,630

Dr: Holdback: 10,000

Dr: Loss on Factor: 9,370

Cr: A/R: 200,000

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

I don't know what the holdback is but here is my version

Dr. Cash 180630

Dr. Interest expense (200*0.15/365*41?) 3370

Dr. Fee 6000

Dr. Holdback, asset I assume 10000

Cr. AR 200000

[Anonymous]

Is the answer for sure 180630? If they hold 10000 back, Taylored shouldn't be paying interest on it, should it?

[JohnWayneIsGod]

That is where I'm mixed up. I'm pretty confident that the 10,000 holdback is a debit, but the rest I'm not really sure about.

My calculations for cash were as follows:

200000-(200000*.05)-(200000*.03)-3370 = 180630

3370 = 200000* ((41/365)*.15)

I rounded up to get the 3370. Again though, I'm uncertain about the entire debit side with the exception of the holdback.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

I think holdback is some sort of receivable

what was the answer given?

[JohnWayneIsGod]

Below are the options. I just needed to find the receivable that was factored, but due to my unfamiliarity with factoring I got intimidated and selected the wrong answer. So right now I'm just trying to understand the JE for factoring transactions so that I'm comfortable with the concept.

Which of the following statements is correct?

A: Taylored should record a liability on factoring of AR of $200,000.

B: Taylored should remove all of the receivables from the books by crediting AR by $200,000.

C: Taylored should remove the receivables without any holdback from the books by crediting AR by $190,000.

D: Taylored should record a liability of $10,000 related to the holdback.

Correct answer was B

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

In wikipedia it's actually called factor's holdback receivable.

“the factor will typically hold back paying the seller for a portion of the receivable being sold (the “factor's holdback receivable”) in order to cover the merchandise returns associated with the factored receivables until the privilege to return the merchandise expires.[3]”

I don't think the interest should be calculated on the amount of holdback

[JohnWayneIsGod]

So interest should be calculated on 200000-10000?

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Author]

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