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Chapter 7: Question E7-16 (page 367)

(Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances.

Debit

Credit

Accounts receivables

\(82,000

Allowance for doubtful accounts

\)2,120

Sales revenue

\(430,000

Instructions

Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)

1. To obtain additional cash, Collins factors without recourse \)25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.

2. To obtain a 1-year loan of \(55,000, Collins pledges \)65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.

3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.

4. Based on an aging analysis, an allowance of \(5,800 should be reported. Assume the allowance has a credit balance of \)1,100.

Short Answer

Expert verified

Debit balance of allowance is added to the bad debt expenses and credit balance is deducted from the bad debt expenses.

Step by step solution

01

Definition of Finance Charges

The fees charged by the financial institution against the loan provided to the borrower are known as finance charges.

02

Journal Entries

Date

Accounts and Explanation

Debit $

Credit $

1

Cash

$22,500

Finance charges$25,000脳10%

$2,500

Accounts receivables

$25,000

(To record the accounts receivables factored)

2

Cash

$50,600

Interest expenses$55,000脳8%

$4,400

Note payable

$55,000

(To record the accounts receivables pledged)

3

Bad Debt expenses$82,000脳5%+$2,120

$6,220

Allowance for doubtful accounts

$6,220

(To record the allowance maintained by the business entity)

4

Bad debt expenses

$4,700

Allowance for doubtful accounts$5,800-$1,100

$4,700

(To record the allowance made for receivables)

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Most popular questions from this chapter

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

What are the effects of the sale of the note receivable with recourse on Rolen鈥檚 income statement for the year ended December 31, 2017, and its balance sheet at December 31, 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

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

(a) How should Moresan determine the interest revenue for 2017 on the:

(1) Interest-bearing note receivable? Why?

(2) Zero-interest-bearing note receivable? Why?

(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.

Presented below are a number of independent situations.

Instructions

For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale.

1. Checking account balance \(925,000; certificate of deposit \)1,400,000; cash advance to subsidiary of \(980,000; utility deposit paid to gas company \)180.

2. Checking account balance \(600,000; an overdraft in special checking account at same bank as normal checking account of \)17,000; cash held in a bond sinking fund \(200,000; petty cash fund \)300; coins and currency on hand \(1,350.

3. Checking account balance \)590,000; postdated check from customer \(11,000; cash restricted due to maintaining compensating balance requirement of \)100,000; certified check from customer \(9,800; postage stamps on hand \)620.

4. Checking account balance at bank \(37,000; money market balance at mutual fund (has checking privileges) \)48,000; NSF check received from customer \(800.

5. Checking account balance \)700,000; cash restricted for future plant expansion \(500,000; short-term Treasury bills \)180,000; cash advance received from customer \(900 (not included in checking account balance); cash advance of \)7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.
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