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.|
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.
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
On March 31
|Discount on Note Receivable||2,800|
On April 3
On April 11
|Cash (96% x 28,829)||27,676|
|Sales Discount(4% x 28,829)||1,153|
On April 17
|Cost of Good Sold||4,000|
On April 30
|Cash (97% x 58,000)||56,260|
|Loss on Accounts Receivable(3% x 58,000)||1,740|
On June 30
To record accrual of interest on notes receivable for four months.
On June 30
|Loss on discount of AR||243|
To record discounting of notes receivable.
On September 30, no necessary entry to be made.
|Date||Income - Increase(Decrease)|
Learn more about this topic:
from Corporate Finance: Help & ReviewChapter 8 / Lesson 7