University - Year 2

Accounting

FACTORING

EXERCISE 5

Dainty Company sold accounts receivable without recourse with face amount of
P6,000,000. The factor charged 15% commission on all accounts receivable factored
and withheld 10% of the accounts factored as protection against customer returns and
other adjustments.

The entity had previously established an allowance for doubtful accounts of P200,000 for
these accounts.

By year-end, the entity had collected the factor's holdback there being no customer returns
and other adjustments.

Cash 4,500,000
Allow. For D/A 200,000
Receivable from factor (10%) 600,000
Loss on factoring 700,000
Accounts receivable 6,000,000
A/R factored 6,000,000
Factor's holdback (10% x 6,000,000) - 600,000
Commission (15% x 6,000,000) - 900,000
Cash received 4,500,000

A/R 6,000,000
Commissions - 900,000
Net sales price 5,100,000
Carrying amount of A/R (6,000,000 - 200,000) -5,800,000
Loss on factoring -700,000
Cash 600,000
Receivable 600,000
Required: Prepare journal entries to record the factoring and the subsequent collection
of the factor's holdback.