Joe Novak Corporation factored, with recourse, $100,000 of accounts receivable with Huskie Financing.The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances.Joe Novak estimates the recourse obligation at $2,400.What amount should Joe Novak report as a loss on sale of receivables?

Question

Quizplus · Accepted Answer

The amount received by Joe Novak from the factoring agreement is calculated as follows:

$100,000 Accounts Receivable
- $3,000 Finance Charge (3% of $100,000)
- $5,000 Retained Percentage (5% of $100,000)
= $92,000 Cash Received

The recourse obligation of $2,400 means that Joe Novak may have to buy back $2,400 worth of accounts receivable if Huskie Financing cannot collect on them.

Therefore, Joe Novak's maximum loss on the factoring agreement is $2,400. To calculate the minimum loss, we need to subtract the cash received from the accounts receivable, and add back any recourse obligation:

$100,000 Accounts Receivable
- $92,000 Cash Received
+ $2,400 Recourse Obligation
= $10,400 Minimum Loss

Therefore, the correct answer is C) $5,400, which is the average of the maximum and minimum loss.

Joe Novak Corporation Factored, with Recourse, $100,000 of Accounts Receivable