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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

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

Debit

Credit

Accounts receivables

\(100,000

Allowance for doubtful accounts

\)2,000

Sales revenue (All on credit)

900,000

Sales return and allowance

50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Taylor Swift Inc. shows the following balances.

Debit

Credit

Accounts Receivable

\(90,000

Allowance for Doubtful Accounts

1,750

Sales revenue (all on credit)

\)680,000

Instructions

Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 5% of gross accounts receivable and Allowance for Doubtful Accounts has a $1,700 credit balance.

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?

Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers.

On August 1, 2017, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge.

Kimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2017, and mature on September 30, 2019. Kimmel鈥檚 operating cycle is less than one year.

Instructions

(a) (1) Using the net method, how should Kimmel account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method?

(2) Using the net method, what is the effect on Kimmel鈥檚 sales revenues and net income when customers do not take the sales discounts?

(b) What is the effect of trade discounts on sales revenues and accounts receivable? Why?

(c) How should Kimmel account for the accounts receivable factor on August 1, 2017? Why?

(d) How should Kimmel account for the note receivable and the related interest on December 31, 2017? Why?

Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.

Instructions

(a) What are the deficiencies of the direct write-off method?

(b) Briefly describe the allowance method to estimate bad debts and the theoretical justification for its use?

(c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?
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