Acompany factored $40,000 of its accounts receivable and was charged a 3% factoring fee. the journal entry to record this transaction would include a:
multiple choice
a. debit to cash of $40,000 and a credit to accounts receivable of $40,000.
b. debit to cash of $38,800, a debit to factoring fee expense of $1,200, and a credit to accounts receivable of $40,000.
c. debit to cash of $40,000 and a credit to notes payable of $40,000.
d. debit to cash of $41,200 and a credit to accounts receivable of $41,200.
e. debit to cash of $40,000, a credit to factoring fee expense of $1,200, and a credit to accounts receivable of $38,800.

Correct answer is B, Debit cash $38,800, debit factoring fee expense $1,200 and a credit of Accounts receivable of $40,000

Explanation:

Factoring is one way to raise fund for immediate use of the company. It is a way to sell accounts receivable of the company. The above-mentioned problem is to sell accounts receivable (factored) with the corresponding factoring fee of 3% and that is $1,200 (40,000 x 3%). In effect of this fee, the company will receive cash less than the amount of its accounts receivable sold. The company will record the inflow of cash at $38,800 (40,000 - 3%) and will also recognize an expense incurred during the factoring in the amount of $1,200 and finally will credit the sold accounts receivable in the amount of $40,000.

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