Blue Corp. factors $100,000 of accounts receivable with recourse. The factor charges a 5% fee and retains 3% of the receivable. The fair value of the recourse obligation is estimated at $2,000. The transfer qualifies as a sale. What is the net cash received and the loss on sale reported by Blue Corp.?

Answer options:

Cash: $95,000 | Loss: $5,000

Cash: $92,000 | Loss: $5,000

Cash: $95,000 | Loss: $7,000

Cash: $92,000 | Loss: $7,000

How to approach this question

1. Cash Received = Face - Fee - Retention (Holdback). 2. Loss = Fee + Recourse Obligation (Fair Value). Note: The retention is a receivable (asset), not a loss.

Full Answer

D.Cash: $92,000 | Loss: $7,000✓ Correct

1. **Cash Received:** $100,000 - $5,000 (Fee) - $3,000 (Retention) = $92,000. 2. **Loss Calculation:** Net Proceeds ($92,000 Cash + $3,000 Due from Factor) = $95,000. Carrying Amount Sold = $100,000. Initial Loss = $5,000. Plus: Recourse Liability recorded = $2,000. Total Loss = $5,000 + $2,000 = $7,000. (Entry: Dr Cash 92k, Dr Due from Factor 3k, Dr Loss 7k; Cr AR 100k, Cr Recourse Liab 2k).

Common mistakes

Treating retention as a loss; forgetting to record the recourse liability as part of the loss.

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