selling receivables with recourse?

Question

If I factor $150,000 of a/r with another company and they assess a finance charge of 2% and also reserves an amount equal to 4% to cover probable adjustments what journal entries are made if all the conditions are met, and what journal entries are made if the conditions are not met?

Answer 1

I'm not sure what you mean by conditions, but if you factor $150,000 with recourse, you have to bear the bad debts, if any. You pay the finance charge of 2% regardless of whether the debtors pay up. It's an expense. The factor usually charges an admin charge too but since you don't mention it, I shall not complicate things. The 4% they cut from you at the outset will be refunded to you if the debtors pay up fully, otherwise the factor will keep whatever is the shortfall. Initially, your entry would be:
Dr Cash 141,000
Dr Finance charge expense 3,000
Dr Amount held by factor as reserve 6,000
Cr Amount due to factor 150,000

If the debtors pay up the full 150k to the factor, you:
Dr Amount due to factor 150,000
Cr AR 150,000
The factor shd refund you the $6k which they deducted as a security because there's no bad debts. When it refunds you, your entry:
Dr Cash 6,000
Cr Amt held by factor as reserve 6,000

If the estimate is accurate and 4% don't pay up, i.e. the debtors pay only $144,000 to the factor, your entry:
Dr Amount due to factor 150,000
Cr AR 150,000

Dr Bad debts expense 6,000
Cr Amt held by factor as reserve 6,000
At this point, you have to recognise the bad debts and the fact that the factor won't be refunding you the $6k. So the factor collected $144k but he only advanced you $141k and he gets to pocket the finance charge of $3k.

Depending how long the debtors take to pay the factor, the finance charge may vary. Or there may be a separate interest charge. At least, that's how I think it works.