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Chapter 7: 6CA_c (page 377)

On September 30, 2016, Rolen Machinery Co. sold a machine and accepted the customer鈥檚 zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen鈥檚 normal pricing practices.

After receiving the first of two equal annual installments on September 30, 2017, Rolen immediately sold the note with recourse. On October 9, 2018, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.

Instructions

(c) How should Rolen account for the effects of the note being dishonored?

Short Answer

Expert verified

When the note is dishonored, the business entity willreduce the cash, increase the note receivable carrying value, and report a loss due to the non-receipt of the payment.

Step by step solution

01

Definition of Maturity Date

A specified date on which the borrower is liable to repay the borrowed amount along with interest is known as the maturity date.

02

Effect of Note Being Dishonored

The dishonored note must be reported as a decrease in cash, increase in receivables and decrease in resource liability. The note receivable must be written down by the amount of money that can be recovered, and loss should be recognized for uncollectible notes.

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Most popular questions from this chapter

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

Debit

Credit

Accounts receivables

\(100,000

Allowance for doubtful accounts

\)2,000

Sales revenue (All on credit)

900,000

Sales return and allowance

50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

Use the information presented in BE7-5 for Wilton, Inc.

(a) Instead of an Allowance for Doubtful Accounts Balance of \(2,400 credit, the balance was \)1,900 debit. Assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expenses.

(b) Instead of estimating uncollectible based on a percentage of receivables, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at \(24,600. (Assume an allowance of \)2,400 credit.) Prepare the entry to record bad debt expenses.

BE7-5 (L03) Wilton, Inc. had net sales in 2017 of \(1,400,000. At December 31, 2017, before adjusting entries, the balances in selected accounts were Accounts Receivable \)250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 8% of its receivables will prove to be uncollectible, prepare the December 31, 2017, journal entry to record bad debt expense.

(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.

(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.

(Assigning Accounts Receivable) On April 1, 2017, Rasheed Company assigns \(400,000 of its accounts receivable to the Third National Bank as collateral for a \)200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).

Instructions

(a) Prepare the April 1, 2017, journal entry for Rasheed Company.

(b) Prepare the journal entry for Rasheed鈥檚 collection of $350,000 of the accounts receivable during the period from April 1, 2017, through June 30, 2017.

(c) On July 1, 2017, Rasheed paid Third National all that was due from the loan it secured on April 1, 2017. Prepare the journal entry to record this payment.

(Petty Cash) Carolyn Keene, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April.

1. On April 1, it established a petty cash fund in the amount of \(200.

2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows

Delivery charges paid on merchandise purchased

\)60

Supplies Purchased and used

25

Postage expenses

33

I.O.U from employees

17

Miscellaneous expenses

36

The petty cash fund was replenished on April 10. The balance in the fund was \(27.

3. The petty cash fund balance was increased \)100 to $300 on April 20.

Instructions

Prepare the journal entries to record transactions related to petty cash for the month of April
See all solutions

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