A company factored $40,000 of its accounts receivable and was charged a 3% factoring fee. The journal entry to record this transaction would include a:
Multiple Choice
a. Debit to Cash of $40,000 and a credit to Accounts Receivable of $40,000.
b. Debit to Cash of $38,800, a debit to Factoring Fee Expense of $1,200, and a credit to Accounts Receivable of $40,000.
c. Debit to Cash of $40,000 and a credit to Notes Payable of $40,000.
d. Debit to Cash of $41,200 and a credit to Accounts Receivable of $41,200.
e. Debit to Cash of $40,000, a credit to Factoring Fee Expense of $1,200, and a credit to Accounts Receivable of $38,800.

Factoring is one way to raise fund for immediate use of the company. It is a way to sell accounts receivable of the company. The above-mentioned problem is to sell accounts receivable (factored) with the corresponding factoring fee of 3% and that is $1,200 (40,000 x 3%). In effect of this fee, the company will receive cash less than the amount of its accounts receivable sold. The company will record the inflow of cash at $38,800 (40,000 - 3%) and will also recognize an expense incurred during the factoring in the amount of $1,200 and finally will credit the sold accounts receivable in the amount of $40,000.