Mehl Wholesalers Co. has been expanding faster than it can raise capital. According to its local banker, the company has reached its debt ceiling. Mehl”s suppliers (creditors) are demanding payment within 30 days of the invoice date for goods acquired, but Mehl”s customers are slow in paying (60–90 days). As a result, Mehl has a cash flow problem.
Mehl needs $120,000 in cash to safely cover next Friday”s payroll. Its balance of outstanding accounts receivable totals $750,000. To alleviate this cash crunch, Mehl sells $125,000 of its receivables on September 7, 2014. Record the entry that Mehl would make when it raises the needed cash. (Assume a 1% service charge.)
To speed up the collection of cash, sell receivables to a factor.
Calculate service charge expense as a percentage of the factored receivables.