ExpertHard1 markMultiple Choice
CPA · Question 20 · Area II: Balance Sheet Accounts
On July 1, Year 1, Spear Co. sold $100,000 of accounts receivable to a factor with recourse. The factor assessed a 5% finance charge and retained 3% of the receivables to cover sales returns. Spear estimates the recourse liability (fair value of recourse obligation) at $2,000. The transaction meets the criteria for a sale. What amount of loss should Spear recognize on the sale?
On July 1, Year 1, Spear Co. sold $100,000 of accounts receivable to a factor with recourse. The factor assessed a 5% finance charge and retained 3% of the receivables to cover sales returns. Spear estimates the recourse liability (fair value of recourse obligation) at $2,000. The transaction meets the criteria for a sale. What amount of loss should Spear recognize on the sale?
Answer options:
A.
$5,000
B.
$8,000
C.
$7,000
D.
$10,000
How to approach this question
Calculate the Net Proceeds (Cash + Due from Factor - Recourse Liab). Loss = Book Value Sold - Net Proceeds. Alternatively: Loss = Finance Charge + Recourse Liab.
Full Answer
C.$7,000✓ Correct
C
Loss on Sale = Finance Fee + Fair Value of Recourse Obligation.<br/>Finance Fee = $100,000 × 5% = $5,000.<br/>Recourse Liability = $2,000.<br/>Total Loss = $5,000 + $2,000 = $7,000.<br/>The 3% retention ($3,000) is recorded as an asset ('Due from Factor') and does not affect the loss.
Common mistakes
Including the retention amount in the loss. Forgetting to include the recourse liability in the loss.
Practice the full CPA FAR Practice Exam 3
50 questions · hints · full answers · grading
More questions from this exam
Q01Dunn Corp. is preparing its Year 1 balance sheet. The following issues were identified during the...HardQ02On October 1, Year 1, Host Co. approved a plan to dispose of a component of its business. The dis...HardQ03Selected financial information for Zeno Corp. for the year ended December 31, Year 1:<br/>- Cost ...MediumQ04Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The...HardQ05A company had the following equity transactions in Year 1:<br/>- Jan 1: 100,000 shares outstandin...Hard