Evergreen Company sells lawn and garden products to wholesalers. The company's fiscal year-end is...

Question:

Evergreen Company sells lawn and garden products to wholesalers. The company?s fiscal year-end is December 31. During 2018, the following transactions related to receivables occurred:

Feb. 28 Sold merchandise to Lennox, Inc. for $36,000 and accepted a 10%, 7-month note. 10% is an appropriate rate for this type of note.
Mar. 31 Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount rate of 10%. The $28,000 payment is due on March 31, 2019.
Apr. 3 Sold merchandise to Carr Co. for $28,829 with terms 4/18, n/38. Evergreen uses the gross method to account for cash discounts.
11 Collected the entire amount due from Carr Co.
17 A customer returned merchandise costing $4,000. Evergreen reduced the customer ?s receivable balance by $5,800, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
30 Transferred receivables of $58,000 to a factor without recourse. The factor charged Evergreen a 3% finance charge on the receivables transferred. The sale criteria are met.
June 30 Discounted the Lennox, Inc., note at the bank. The bank's discount rate is 12%. The note was discounted without recourse.
Sep. 38 Lennox, Inc., paid the note amount plus interest to the bank.

Required:

1. Prepare the necessary Journal entries for Evergreen for each of the above dates. For transactions involving the sale of merchandise.

2. Prepare any necessary adjusting entries at December 31, 2018. Adjusting entries are only recorded at year-end.

3. Prepare a schedule showing the effect of the Journal entries on 2018 Income before taxes.

Receivable Financing:

Receivables are one of the most liquid asset a business can have. If an entity is out of cash to finance its operation, another option is to have receivable financing. Receivable can either be pledged, assigned, discounted or even be on sale.

Answer and Explanation:

Requirement 1 The journal entry to record the transactions are as follows;

On February 28

Account Title Debit Credit
Note Receivable 36,000
Sales Receivable 36,000

On March 31

Account Title Debit Credit
Note Receivable 28,000
Discount on Note Receivable 2,800
Sales Receivable 25,200

On April 3

Account Title Debit Credit
Accounts Receivable 28,829
Sales Receivable 28,829

On April 11

Account Title Debit Credit
Cash (96% x 28,829) 27,676
Sales Discount(4% x 28,829) 1,153
Accounts Receivable 28,829

On April 17

Account Title Debit Credit
Sales Return 5,800
Account Receivable 5,800
Inventory 4,000
Cost of Good Sold 4,000

On April 30

Account Title Debit Credit
Cash (97% x 58,000) 56,260
Loss on Accounts Receivable(3% x 58,000) 1,740
Accounts Receivable 58,000

Required 2

On June 30

Account Title Debit Credit
Interest Receivable 1,200
Interest Revenue 1,200

To record accrual of interest on notes receivable for four months.

On June 30

Account Title Debit Credit
Cash 36,957
Loss on discount of AR 243
Interest Receivable 1,200
Notes Receivable 36,000

To record discounting of notes receivable.

On September 30, no necessary entry to be made.

Required 3

Date Income - Increase(Decrease)
February 28 36,000
March 31 25,200
April 3 28,829
April 11 (1,153)
April 17 (5,800)
April 17 4,000
April 30 (1,740)
June 30 1,200
June 30 (243)
December 31 2,100
Total 88,393

Learn more about this topic:

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