Question

Woody company sold $150,000 of its accounts receivable without recourse. The purchaser assessed a finance charge of 5%. Woody should record



a.Interest expense of $7,500.



b.A credit to liability on transferred accounts receivable of $150,000.



c.A credit to accounts receivable of $150,000.



d.A debit to cash of $150,000. Answer

Answer 1

c. A credit to accounts receivable of $150,000.

Answer 2

Answer:

Woody should record c) a credit to accounts receivable of $ 150,000

Explanation:

If the seller of the receivables withdraws funds from the account, the seller will owe interest on the amount withdrawn for the period until the factor collects the receivables from the seller's customers.

Woody would not have been able to receive the full face amount of the receivables from the factor because Woody did not receive $150,000 in cash, the cash account should not be debited for $150,000.

Since the receivables were sold without recourse, Woody will have no recourse liability for uncollectible accounts.

If the seller of the receivables withdraws funds from the account, the seller will owe interest on the amount withdrawn for the period until the factor collects the receivables from the seller's customers.

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