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Chapter 7: Question 8 (page 362)
What are the basic problems that occur in the valuation of accounts receivable?
A business entity faces difficulties relating to face value determination, probability of collection, and determination of outstanding period while valuing accounts receivable.
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What are two methods of recording accounts receivable transactions when a cash discount situation is involved? Which is more theoretically correct? Which is used in practice more of the time? Why?
Explain how accounting for bad debts can be used for earnings management.
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.
1. January cash receipts recorded in the December cash book totaled \(45,640, of which \)28,000 represents cash sales, and \(17,640 represents collections on account for which cash discounts of \)360 were given.
2. January cash disbursements recorded in the December check register liquidated accounts payable of \(22,450 on which discounts of \)250 were taken.
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December 31, 2017.
The company uses the periodic method of inventory.
Instructions
(a) Prepare any entries you consider necessary to correct Francis鈥檚 accounts at December 31.
(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:
Debit | Credit | |
Cash | \(39,000 | |
Accounts receivables | 42,000 | |
Inventory | 67,00 | |
Accounts payable | \)45,000 | |
Other Current liabilities | 14,200 |
(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.
1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt鈥檚 books at a cost of \(590,000.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).
Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
Instructions
Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.
(Journalizing Various Receivable Transactions) Presented below is information related to James Garfield Corp., which sells merchandise with terms 2/10, net 60. Garfield records its sales and receivables net.
July 1 James Garfield Corp. sold to Warren Harding Co. merchandise having a sales price of \(8,000.
5 Accounts receivable of \)9,000 (gross) are factored with Andrew Jackson Credit Corp. without recourse at a financing charge of 9%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.)
9 Specific accounts receivable of \(9,000 (gross) are pledged to Alf Landon Credit Corp. as security for a loan of \)6,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.)
Dec. 29 Warren Harding Co. notifies Garfield that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)
Instructions
Prepare all necessary entries in general journal form for Garfield Corp
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