Question

Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a without-recourse basis. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.

Short answer

Interest revenue earned by Engram equals$3,000.

Step-by-step solution

Definition of Accounts Receivable

The current asset account, including the money due from the customers to whom sales were made on credit terms, is known as accounts receivable.

Journal Entries for Wood Incorporated

Date	Accounts and Explanation	Debit $	Credit $
	Cash	$138,000
	Due from factor$\left(150,000\times 6\%\right)$	$9,000
	Loss on sale of receivable$\left(150,000\times 2\%\right)$	$3,000
	Accounts receivables		$150,000

Journal Entries for Engram

Date	Accounts and Explanation	Debit $	Credit $
	Accounts receivable	$150,000
	Due to customer$\left(150,000\times 6\%\right)$		$9,000
	Interest revenue$\left(150,000\times 2\%\right)$		$3,000
	Cash		$138,000