Maxwell 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. Maxwell estimates the recourse obligation at $2,400. What amount should Maxwell report as a loss on sale of receivables?

Question

Quizplus · Accepted Answer

The amount received by Maxwell Corporation from the factoring of accounts receivable is calculated as follows:
$100,000 - 3% finance charge = $97,000
The amount retained to cover sales discounts, sales returns, and sales allowances is 5% of $100,000, or $5,000.
Therefore, the net amount received by Maxwell is $92,000 ($97,000 - $5,000).
Since this factoring is with recourse, Maxwell is still liable for any uncollected amounts from the accounts receivable. Maxwell estimates the recourse obligation to be $2,400. Therefore, the loss on sale of receivables is calculated as:
$92,000 - $100,000 + $2,400 = $-5,600
However, since the loss cannot be negative, the answer is $5,400.

Maxwell Corporation Factored, with Recourse, $100,000 of Accounts Receivable with Huskie