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Chapter 7: Question: P7-11 (page 374)

GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.

2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg鈥檚 accounts receivable. Sandburg鈥檚 first payment to First Bank is due on January 30, 2018.

Instructions

Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.

Short Answer

Expert verified

The income statement will report interest expenses of$52,320.

Step by step solution

01

Definition of Interest Expenses

The expenses or sacrifices that are incurred against the amount borrowed from any financial institution are known as interest expenses.

02

Schedule Showing Effect on the Income Statement

Particular

Amount $

Amount $

Assignment on July 1, 2017 $400,000-80%脳3%$400,000脳80%脳3%

$9,600

Add: Interest expenses prior to 31 Dec 2017

$12,720

Add: Assignment on 1 Dec 2017$300,000-$270,000

$30,000

Interest expenses

$52,320

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Most popular questions from this chapter

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account of \(600,000 and a commercial checking account balance of \)900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, \(5,000,000.

3. Travel advances of \)180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of \(1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of \)1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of \(190,000.

7. A bank overdraft of \)110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling \(500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2018, in the amount of \)125,000.

10. Eastwood has agreed to maintain a cash balance of \(500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased \)2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700.

Instructions

(a) Compute the amount of cash to be reported on Eastwood Co.鈥檚 balance sheet at December 31, 2017.

(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.

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.

(Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date

Customer

Amount \(

March 31

E.L Masters Company

\)7,800

June 30

Stephen Crane Associates

6,700

September 30

Amy Lowell鈥檚 Dress Shop

7,000

December 31

R. Frost. Inc

9,830

Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.

All of Dickinson鈥檚 sales are on a 30-day credit basis. Sales for the current year total \(2,200,000. The balance in Accounts Receivable at year-end is \)77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).

Instructions

(a) Do you agree or disagree with Dickinson鈥檚 policy concerning recognition of bad debt expense? Why or why not?

(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?

Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting鈥檚 measurement function.

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.
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