Jervis sells $75,000 of its accounts receivable to Northern Bank in order to obtain necessary cash.Northern Bank charges a 5% factoring fee.What entry should Jervis make to record the transaction?

A) Debit Cash $71,250; debit Factoring Fee Expense $3,750; credit Accounts Receivable $75,000
B) Debit Accounts Receivable $71,250; debit Factoring Fee Expense $3,750; credit Cash $75,000
C) Debit Cash $75,000; credit Factoring Fee Expense $3,750; credit Accounts Receivable $75,000
D) Debit Cash $71,250; credit Accounts Receivable $71,250
E) Debit Accounts Receivable $75,000; credit Factoring Fee Expense $3,750; credit Cash $71,250

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Savannah Claypool · Accepted Answer

Final Answer : A, Explanation :  Jervis is selling its accounts receivable to Northern Bank, which means that the accounts receivable will decrease, and cash will increase. The factoring fee is an expense and should be recorded as such. Therefore, the correct entry would be to debit cash for the amount received ($75,000 x 0.95 = $71,250), debit factoring fee expense for the fee ($75,000 x 0.05 = $3,750), and credit accounts receivable for the full amount sold.

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