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Chapter 7: 5E (page 365)

On June 3, Arnold Company sold to Chester Company merchandise having a sale price of \(3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling \)90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Chester Company

Instructions

(a) Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.

(1) Sales and receivables are entered at gross selling price.

(2) Sales and receivables are entered at net of cash discounts.

(b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.

Short Answer

Expert verified

1. Under gross method,sales are recorded at gross amount.

2. Under net method,sales are recorded at net discount.

Step by step solution

01

Definition of Discount Forfeited

If the customer makes payment after the specified period for a discount, the discount account is credited in the journal entry, known as discount forfeited.

02

Journal Entries Under Gross Method

Date

Accounts and Explanation

Debit $

Credit $

3 June

Accounts receivables

$3,000

Sales

$3,000

(To record the sales made on account)

12 June

Cash

$2,940

Discount allowed

$60

Accounts receivables

$3,000

(To record the cash payment received for credit sales)

03

Journal Entries Under Net Method

Date

Accounts and Explanation

Debit $

Credit $

3 June

Accounts receivables

$2,940

Sales

$2,940

(To record the sales made on account)

12 June

Cash

$2,940

Accounts receivables

$2,940

(To record the cash payment received for credit sales)

04

Journal Entry When Payment is Not Remitted

Date

Accounts and Explanation

Debit $

Credit $

29 July

Cash

$3,000

Accounts receivables

$2,940

Sales discount forfeited

$60

(To record the cash payment received for credit sales and discount forfeited)

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Most popular questions from this chapter

Because of calamitous earthquake losses, Bernstein Company, one of your client鈥檚 oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client鈥檚 total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company鈥� none of which is collectible鈥攅quals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.

(Bad-Debt Reporting) Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.

Instructions

(a) In a recessionary environment with tight credit and high interest rates:

(1) Identify steps Marvin Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identified in terms of the risks and costs involved.

(b) Should the controller be concerned with Marvin Company鈥檚 growth rate in estimating the allowance? Explain your answer.

(c) Does the president鈥檚 request pose an ethical dilemma for the controller? Give your reasons.

Define a 鈥渃ompensating balance.鈥� How should a compensating balance be reported?

Arness Woodcrafters sells \(250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be \)8,000. Prepare the journal entry for Arness to record the sale.

What are the basic problems that occur in the valuation of accounts receivable?
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