On February 1, 2017, Strawberry Corp.factored receivables with a carrying amount of $250,000 to Shortcake Inc.Shortcake assessed a finance charge of 3% of the receivables and retained 5% of the receivables.Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Strawberry Corp.for February.Assume that Strawberry factors the receivables on a without recourse basis.The loss to be reported is

Question

Quizplus · Accepted Answer

The finance charge assessed by Shortcake Inc. is 3% of the receivables, which is $7,500 (3% x $250,000). In addition, Shortcake retained 5% of the receivables, which is $12,500 (5% x $250,000).

Therefore, the cash received by Strawberry Corp. is $230,000 ($250,000 - $7,500 - $12,500). Since Strawberry Corp. factors the receivables on a without recourse basis, it assumes the risk of customer defaults.

If any customers default on their payments, Strawberry Corp. would be responsible for repaying Shortcake for the defaulted amount. Thus, Strawberry Corp. must recognize a loss on the sale of the receivables to reflect the risk it is assuming.

The loss on sale can be calculated as follows:
Loss on sale = carrying amount of receivables - cash received from Shortcake
Loss on sale = $250,000 - $230,000
Loss on sale = $20,000

Therefore, the amount of loss on sale to be reported in the income statement of Strawberry Corp. for February is $7,500 (finance charge) + $12,500 (retained percentage) + $20,000 (loss on sale) = $40,000. However, since the question only asks for the loss on sale, the correct answer is B) $7,500.