Pharaoh Furniture factors $740000 of receivables to Concord Factors, Inc. Concord Factors assesses a 2% service charge on the amount of receivables sold. Pharoah Furniture factors its receivables regularly with Concord Factors. What journal entry does Pharoah make when factoring these receivables

Debit Cash account   $725,200

Debit Factoring loss (p/l)   $14,800

Credit Accounts receivable  $740,000

Being entries to account for factored receivables.

Explanation:

Debt factoring is the process by which a company sells its receivables  to another party for cash usually at an amount lower than the accounts receivable amount. The party that purchased the debt now own then owns it and runs after the customer for settlement.

The entries required in the books of the selling party are

Debit Cash account

Debit Factoring loss (p/l)

Credit Accounts receivable

Being entries to account for factored receivables.

Factoring loss = 2% × $740,000

= $14,800

Cash received = $740,000 - $14,800

= $725,200

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