On July 1, Factor Co. transferred receivables with a face value of $100,000 to Finance Corp. Factor Co. retained a 5% holdback for adjustments. Finance Corp. charged a 3% fee and withheld the holdback. The transfer was without recourse and met the criteria for a sale. What is the loss on sale reported by Factor Co.?

Answer options:

$3,000

$8,000

$5,000

How to approach this question

Journal Entry: Dr Cash, Dr Due from Factor (Holdback), Dr Loss (Fee), Cr AR. The Loss is strictly the finance fee.

Full Answer

A.$3,000✓ Correct

In a factoring arrangement without recourse treated as a sale, the difference between the book value of the receivables sold and the proceeds received (cash + beneficial interest/holdback) is the loss. Proceeds = Cash ($92k) + Holdback ($5k) = $97k. BV = $100k. Loss = $3k. Alternatively, Loss = Finance Fee ($3k).

Common mistakes

Treating the holdback as an expense/loss.

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