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Answer :
Final answer:
The correct recording of the sale by Balus Company of $125,000 in accounts receivable is option C, as this accurately represents the economic events of the transaction with respect to the factoring fee.
Explanation:
The correct recording of the sale by Balus Company of $125,000 in accounts receivable, being charged a 2.5% factoring fee, is option C) Debit: Cash $121,250; Credit: Factoring Fees Expense $3,750; Credit: Accounts Receivable $125,000. In this transaction, Balus company sold its accounts receivable and received cash, decreasing its accounts receivable and increasing its cash.
However, the company is not getting the full $125,000 due to the 2.5% factoring fee, hence the cash is lesser by the amount of the fee. The fee itself is treated as an expense. This accounting entry accurately represents the economic events of the transaction.
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Final answer:
The correct recording of the sale of accounts receivable by Balus Company as per the scenario given would be a Debit: Cash $121,250; Credit: Factoring Fees Expense $3,750; Credit: Accounts Receivable $125,000. This accounts for both the cash received after the factoring fee and the removal of the accounts receivable value from the company's accounts.
Explanation:
The correct recording of this transaction is given by option C. Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (factor) at a discount. In the scenario given, Balus Company has sold $125,000 in accounts receivable and has been charged a 2.5% factoring fee.
Firstly, the company would receive cash from the accounts receivable sales, but it would be less the factoring fee. The factoring fee calculates to be $125,000*2.5/100 = $3,750. Therefore, Balus Company will receive $125,000 - $3,750 = $121,250 in cash.
Afterward, the accounts receivables value of $125,000 will need to be removed from the company's accounts and a factoring fee of $3,750 will be recorded as an expense. Therefore, the entry will be: Debit: Cash $121,250; Credit: Factoring Fees Expense $3,750; Credit: Accounts Receivable $125,000.
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