On February 1, 2020, 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 disposal to be reported in the income statement of Strawberry Corp. for February. Assume that Strawberry factors the receivables on a with recourse basis. The recourse obligation has a fair value of $1,000. The loss to be reported is

Question

Quizplus · Accepted Answer

The loss on disposal to be reported in the income statement of Strawberry Corp. for February can be calculated as:

Proceeds from factoring receivables: $250,000 x (1-5%) = $237,500
Finance charge retained by Shortcake: $250,000 x 3% = $7,500
Recourse obligation fair value: $1,000

Total cost of factoring receivables: $250,000 + $7,500 + $1,000 = $258,500

Loss on disposal: $258,500 - $237,500 = $21,000
However, since the factoring was done on a with recourse basis, the fair value of the recourse obligation of $1,000 can be used to reduce the loss on disposal. Therefore, the net loss on disposal to be reported in the income statement of Strawberry Corp. for February is $21,000 - 0 = $21,000. Since the question is asking for the amount of loss on disposal, not the net loss on disposal, the answer is $21,000 - $12,500 = $8,500 (where $12,500 is the sum of the finance charge retained and the recourse obligation fair value). Therefore, the correct answer is choice C, $8,500.