Magrath Company has an operating cycle of less than one year and provides credit terms for all of...

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Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 3, 2007, the company factored, without recourse, some of its accounts receivable. On August 1, 2007, Magrath sold special order merchandise and received an interest-bearing note due April 30, 2008. Magrath uses the allowance method to account for uncollectible accounts. During 2007, some accounts were written off as uncollectible, and other accounts previously written off as uncollectible were collected.
Required
1. Explain how Magrath should account for and report the accounts receivable factored on April 3, 2007. Why is this accounting treatment appropriate?
2. Explain how Magrath should report the effects of the interest-bearing note on its income statement for the year ended December 31, 2007 and its December 31, 2007 balance sheet.
3. Explain how Magrath should account for the collection of the accounts previously written off as uncollectible.
4. What are the two basic approaches to estimating uncollectible accounts under the allowance method? What is the rationale for each approach?

Robert · Accepted Answer

Solutions to Order ID TTs180313_89940_1 
 
 
1) On April 3, 2007, when the accounts receivables are sold outright without recourse, 
Cash is debited, related Accounts Receivables and Allowance for Doubtful Accounts are 
closed, and an expense account is debited for factoring charges. When part of the 
purchase price is withheld by the factor, a Receivable from the Factor account is 
established pending final settlement.   
 
Factoring accounts receivable without recourse is actually an outright sale of the 
company’s accounts receivable to a firm called factor, usually a bank.  Without recourse 
means that the factor company could no longer demand payment from the company 
which sold the accounts receivable in case of default by a customer. Therefore, the 
accounts receivable account of customers which are factored shall be removed or 
closed from the books of the company.

Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 3, 2007, the company factored, without recourse, some of its accounts...

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