Lacuna Inc. factors $12,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Lacuna estimates the fair value of the recourse liability at $600,000. What would be recorded as a loss on the transfer of receivables

The loss on transfer of receivables is $960,000

Explanation:

Sales amount                                       $12,000,000

Finance charge 3%*$12 million              ($360,000)

Retention amount 10%*$12 million           ($1,200,000)

Cash upfront                                           $ 10,440,000

The recourse liability is $600,000,which means that additional liability of $600,000 would be incurred by Lacuna Inc, if the total amount from the receivables is not received owing to the fact that the factoring is with recourse.

The loss on transfer of receivables is shown as:

Finance charge                    $360,000

Recourse liability                  $600,000

total loss                                 $960,000