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Chapter 7: Question E7-21 (page 368)

(Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling \(25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is \)1,200.

Instructions

(a) Prepare the journal entry to record the sale of the receivables.

(b) Compute Jones鈥檚 accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.

Short Answer

Expert verified

The business entity incurs a loss of $2,200 on the sale of receivables.

Step by step solution

01

Definition of Creditors

The individual or business lending cash or from whom the business entity has purchased goods on credit are creditors.

02

Journal Entry to Record the Sale of Receivable

Date

Accounts and Explanation

Debit $

Credit $

Cash

$22,750

Due from factor

$1,250

Loss on sale

$2,200

Resource liability

$1,200

Account receivables

$25,000

Working note:

Computation of cash received:

Particular

Amount $

Accounts receivable

$25,000

Less: Due from factor$25,000脳5%

($1,250)

Less: Finance charges$25,000脳4%

($1,000)

Cash received

$22,750

Add: Due from factors

$1,250

Less: Resource liability

($1,200)

Net proceeds

$22,800

Computation of loss:

Particular

Amount $

Carrying value

$25,000

Less: Net proceeds

($22,800)

Loss on sale

$2,200

03

Accounts Receivables Turnover Ratio

After factoring in receivables, the turnover ratio has declined but had declined less than in the previous part. The collection of receivables is slower, but the business entity can convert them into cash.

Receivable鈥檚 turnover:

ReceivablesTurnoverRatio=NetSalesAverageAccountsReceivables=$100,00015,000+$20,0002=$100,000$17,500=5路71times

Days to collect:

DaystoCollectReceivables=365AccountsReceivablesturnoverratio=3655路71=63路92days

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Most popular questions from this chapter

3. Which of the following statements is false?

(a) Receivables include equity securities purchased by the company.

(b) Receivables include credit card receivables.

(c) Receivables include amounts owed by employees as a result of company loans to employees.

(d) Receivables include amounts resulting from transactions with customers.

What may be included under the heading of 鈥渃ash鈥�?

(Bank Reconciliation and Adjusting Entries) The cash account of Aguilar Co. showed a ledger balance of \(3,969.85 on June 30, 2017. The bank statement as of that date showed a balance of \)4,150. Upon comparing the statement with the cash records, the following facts were determined.

1. There were bank service charges for June of \(25.

2. A bank memo stated that Bao Dai鈥檚 note for \)1,200 and interest of \(36 had been collected on June 29, and the bank had made a charge of \)5.50 on the collection. (No entry had been made on Aguilar鈥檚 books when Bao Dai鈥檚 note was sent to the bank for collection.)

3. Receipts for June 30 for \(3,390 were not deposited until July 2.

4. Checks outstanding on June 30 totaled \)2,136.05.

5. The bank had charged the Aguilar Co.鈥檚 account for a customer鈥檚 uncollectible check amounting to \(253.20 on June 29.

6. A customer鈥檚 check for \)90 (as payment on the customer鈥檚 Accounts Receivable) had been entered as \(60 in the cash receipts journal by Aguilar on June 15.

7. Check no. 742 in the amount of \)491 had been entered in the cash journal as \(419, and check no. 747 in the amount of \)58.20 had been entered as $582. Both checks had been issued to pay for purchases and were payments on Aguilar鈥檚 Accounts Payable.

Instructions

(a) Prepare a bank reconciliation dated June 30, 2017, proceeding to a correct cash balance.

(b) Prepare any entries necessary to make the books correct and complete.

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.

Restin Co. uses the gross method to record sales made on credit. On June 1, 2017, it made sales of $50,000 with terms 3/15, n/45. On June 12, 2017, Restin received full payment for the June 1 sale. Prepare the required journal entries for Restin Co.
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