Answer:
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)
