Wilkinson Corporation factored, with recourse, $400,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Wilkinson estimates the recourse obligation at $9,600. What amount should Wilkinson report as a loss on sale of receivables?

Question

Quizplus · Accepted Answer

The amount received by Wilkinson from the factoring transaction is calculated as:
Original accounts receivable: $400,000
Less: Sales discounts, returns, and allowances (5%): $20,000
Net accounts receivable: $380,000
Plus: Finance charge (3% of $400,000): $12,000
Proceeds from factoring: $392,000

The recourse obligation of $9,600 represents the amount that Wilkinson may have to pay to Huskie Financing if any of the accounts receivable are not collected. This means that if some of the receivables are uncollectible, Wilkinson will have to repay Huskie Financing from its own funds. Therefore, this should be treated as a loss.

The loss on sale of receivables is calculated as the difference between the amount received from factoring and the total amount of accounts receivable sold:
Loss on sale of receivables = Total accounts receivable sold – Proceeds from factoring + Recourse obligation
Loss on sale of receivables = $400,000 - $392,000 + $9,600
Loss on sale of receivables = $17,600

Therefore, the correct answer is C) $21,600 (loss on sale of receivables of $17,600 + recourse obligation of $9,600).

Wilkinson Corporation Factored, with Recourse, $400,000 of Accounts Receivable with Huskie