Flint Incorporated factored $134,700 of accounts receivable with Buffalo Factors Inc. on a without-recourse basis. Buffalo assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Flint Incorporated and Buffalo Factors to record the factoring of the accounts receivable to Buffalo

Answer with Explanation:

The Finance charge can be calculated as under:

Finance Charge = Accounts Receivable * Finance charge rate

Finance Charge = $134,700 * 2% = $2694

This would be accounted for as under:

Dr Finance Charge $2694

Cr Cash                                $2694

The 6% which 8082 (6% * $134,700) would be the possible bad debts which requires a provision:

Dr Bad Debts $8082

Cr         Accounts receivable $8082

The reason is that in the non recourse factoring the factor doesn't suffers any losses due to bad debts.

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