Sheffield Furniture factors $914000 of receivables to Ivanhoe, Inc. Ivanhoe assesses a 3% service charge on the amount of receivables sold. Sheffield Furniture factors its receivables regularly with Ivanhoe Factors. What journal entry does Sheffield make when factoring these receivables?

Amount of cash received = $886580

Factoring Commission = $27420

Explanation:

Amount of cash received = 914000 x 97% = 886580

Factoring Commission = 914000 x 3% =27420

Total Receivable= 886580+27420=$914000

Dr Cash 886,580

Dr Factoring fees 27,420

    Cr Accounts receivable 914,000

Explanation:

In business, factoring companies purchase accounts receivables from other companies at a discount price and then they collect them earning the difference.  

There are two ways to record factoring expenses:

In this case, the factoring fees were $914,000 x 3% = $27,420, and didn't represent a significant cost. Therefore they can be recorded as a loss on sales or factoring fees. Since Sheffield usually does this type of transactions, in my opinion the proper record should be factoring fees.