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29 June, 00:38

Glebe Company accepted a credit card account receivable in exchange for $1,100 of services provided to a customer. The credit card company charges a 5% fee for handling the transaction. What effect will the collection of cash from the credit card company have on the elements of the financial statements

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  1. 29 June, 02:08
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    As such, the effect on the elements of the financial statements are

    Cash increases by $1,045 and receivable decreases by $1100 resulting in a net decrease in assets by $55.

    Expense in the statement of other income increase by $55, thereby resulting in a decrease in owner's equity by the same amount.

    Explanation:

    This type of transaction is called factoring of receivables. When receivable are factored, the company sells the receivable to another and incurs a charge.

    This is usually done to ease liquidity pressures.

    The entries required on factoring

    Debit Cash

    Debit Factoring/interest expense

    Credit Account receivable

    The Factoring charge

    = 5% * $1,100

    = $55

    Amount of cash received

    = $1,100 - $55

    = $1,045 (posted to cash)
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