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Chapter 7: Question E7-20 (page 368)

(Analysis of Receivables) Presented below is information for Jones Company.

1. Beginning-of-the-year Accounts Receivable balance was \(15,000.

2. Net sales (all on account) for the year were \)100,000. Jones does not offer cash discounts.

3. Collections on accounts receivable during the year were $70,000.

Instructions

(a) Prepare (summary) journal entries to record the items noted above.

(b) Compute Jones鈥檚 accounts receivable turnover and days to collect receivables for the year. The company does not believe it will have any bad debts.

(c) Use the turnover ratio computed in (b) to analyze Jones鈥檚 liquidity. The turnover ratio last year was 6.0

Short Answer

Expert verified

The liquidity of the business entity is declining because of a decrease in the receivable turnover ratio.

Step by step solution

01

Definition of Liquidity Analysis

The analysis concerned with the determination of the ability of the business to repay the short-term borrowing using its current assets is known as liquidity analysis.

02

Summary Journal Entries

Date

Accounts and Explanation

Debit $

Credit $

1

Accounts receivables

$100,000

Sales revenue

$100,000

2

Cash

$70,000

Accounts receivables

$70,000

03

Financial Ratios

Receivables turnover ratio:

ReceivablesTurnoverRatio=NetSalesAverageAccountsReceivables=$100,00015,000+$45,0002=$100,000$30,000=3路33times

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Most popular questions from this chapter

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?

What is the accounts receivable turnover, and what type of information does it provide?

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

(b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2017?

(Transfer of Receivables with Recourse) Beyonc茅 Corporation factors \(175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2017. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.

Instructions

(a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?

(b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2017, for Beyonc茅 to record the sale of receivables, assuming the recourse obligation has a fair value of \)2,000.

Springsteen Inc. reported in a recent annual report 鈥淩estricted cash for debt redemption.鈥� What section of the balance sheet would report this item?
See all solutions

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