On February 1, 2020, Henson Company factored receivables with a carrying amount of $700,000 to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and retains 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 Henson Company for February. Assume that Henson factors the receivables on a with recourse basis. The recourse obligation has a fair value of $5,500. The total loss or expense to be reported on the income statement is

The correct answer is $21,000.

Explanation:

According to the scenario, the given data are as follows:

Receivable = $700,000

Finance charges =3% of receivable

Retains = 5% of the receivable

Fair value of recourse obligation = $5,500

Retention amount can be both refundable and Non refundable.

As there is no such information about retention amount. So, we consider it as refundable amount.

So, The loss to the company is of Finance charges only.

So, Loss = 3% × $700,000

= $21,000.

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