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  1. Subjects ›
  2. CPA Financial Accounting and Reporting Far ›
  3. Question of the Day

CPA Financial Accounting and Reporting Far Question of the Day

CPA Financial Accounting and Reporting Far Question of the Day

Answer today's CPA Financial Accounting and Reporting Far question, reveal the full explanation, then keep the streak going with a new question every day.

Oceanview Inc. factored 400,000ofaccountsreceivabletoPacificFinanceonawith−recoursebasis.PacificFinancechargeda12400,000 of accounts receivable to Pacific Finance on a with-recourse basis. Pacific Finance charged a 12% commission and retained 8% of the receivables as a security deposit. Based on the recourse provision and collection history, Oceanview estimates a recourse liability of 400,000ofaccountsreceivabletoPacificFinanceonawith−recoursebasis.PacificFinancechargeda1215,000. What amount should Oceanview record as a loss on the sale of receivables?

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Question of the Day

Oceanview Inc. factored 400,000ofaccountsreceivabletoPacificFinanceonawith−recoursebasis.PacificFinancechargeda12400,000 of accounts receivable to Pacific Finance on a with-recourse basis. Pacific Finance charged a 12% commission and retained 8% of the receivables as a security deposit. Based on the recourse provision and collection history, Oceanview estimates a recourse liability of 400,000ofaccountsreceivabletoPacificFinanceonawith−recoursebasis.PacificFinancechargeda1215,000. What amount should Oceanview record as a loss on the sale of receivables?

  1. $63,000 reflecting the total costs of the factoring arrangement including estimated recourse liability (correct answer)
  2. $48,000 representing only the commission charged by the finance company without recourse considerations
  3. $80,000 combining commission, security deposit retention, and estimated recourse liability amounts
  4. $32,000 calculated as the security deposit plus estimated recourse liability components only

Explanation: In a factoring arrangement with recourse, the loss on sale includes: (1) commission expense of 400,000×12400,000 × 12% = 400,000×1248,000, and (2) estimated recourse liability of 15,000.Thesecuritydepositof15,000. The security deposit of 15,000.Thesecuritydepositof400,000 × 8% = 32,000isrecordedasareceivablefromthefactor,notasaloss.Totalloss=32,000 is recorded as a receivable from the factor, not as a loss. Total loss = 32,000isrecordedasareceivablefromthefactor,notasaloss.Totalloss=48,000 + 15,000=15,000 = 15,000=63,000. Option B ignores the recourse liability. Option C incorrectly treats the security deposit as a loss. Option D omits the commission, which is the primary cost of factoring.