The Steven Co.sells $50, 000 of accounts receivable to a factor and receives 92% of the value of the factored accounts less a 10% commission based on the gross amount of factored accounts receivable.After the journal entry to record this factoring transaction is made, Steven Co.'s total assets will be

Question

Quizplus · Accepted Answer

The amount received by the Steven Co. from the factor is calculated as follows:

$50,000 × 92% = $46,000

The commission charged by the factor is calculated as follows:

$50,000 × 10% = $5,000

Therefore, the journal entry to record the factoring transaction is:

Cash (received from factor)           $46,000
Loss on Sale of Accounts Receivable     $5,000
Accounts Receivable (sold to factor)   $50,000

The loss on sale of accounts receivable is calculated as follows:

$50,000 - $46,000 = $4,000

This loss is recognized on the income statement and reduces the company's net income. However, it does not affect the company's total assets, as the cash received from the factor is used to pay down accounts receivable.

Therefore, after the factoring transaction, the company's total assets will be reduced by the amount of accounts receivable sold to the factor, which is $50,000 - $46,000 = $4,000. In addition, the commissions paid to the factor reduce the company's net income.