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Chapter 7: Question 8 (page 362)
What are the basic problems that occur in the valuation of accounts receivable?
A business entity faces difficulties relating to face value determination, probability of collection, and determination of outstanding period while valuing accounts receivable.
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On October 1, 2017, Chung, Inc. assigns \(1,000,000 of its accounts receivable to Seneca National Bank as collateral for a \)750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.
Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow鈥檚 Accounts Receivable account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.
Days Account Outstanding | Amount | Probability of Collection |
Less than 16 days | $300,000 | .98 |
Between 16 and 30 days | 100,000 | .90 |
Between 31 and 45 days | 80,000 | .85 |
Between 46 and 60 days | 40,000 | .80 |
Between 61 and 75 days | 20,000 | .55 |
Over 75 days | 15,000 | .00 |
Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
(b) Show how accounts receivable would be presented on the balance sheet.
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
Dold Acrobats lent \(16,529 to Donaldson, Inc., accepting Donaldson鈥檚 2-year, \)20,000, zero-interest-bearing note. The implied interest rate is 10%. Prepare Dold鈥檚 journal entries for the initial transaction, recognition of interest each year, and the collection of $20,000 at maturity.
In what accounts should the following items be classified? (a) Coins and currency. (b) U.S. Treasury (government) bonds. (c) Certificate of deposit (matures in 5 months). (d) Cash in a bank that is in receivership. (e) NSF check (returned with bank statement). (f) Deposit in foreign bank (exchangeability limited). (g) Postdated checks. (h) Cash to be used for retirement of long-term bonds. (i) Deposits in transit. (j) 100 shares of HP stock (intention is to sell in one year or less). (k) Savings and checking accounts. (l) Petty cash. (m) Stamps. (n) Travel advances.
(Journalizing Various Receivable Transactions) Presented below is information related to James Garfield Corp., which sells merchandise with terms 2/10, net 60. Garfield records its sales and receivables net.
July 1 James Garfield Corp. sold to Warren Harding Co. merchandise having a sales price of \(8,000.
5 Accounts receivable of \)9,000 (gross) are factored with Andrew Jackson Credit Corp. without recourse at a financing charge of 9%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.)
9 Specific accounts receivable of \(9,000 (gross) are pledged to Alf Landon Credit Corp. as security for a loan of \)6,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.)
Dec. 29 Warren Harding Co. notifies Garfield that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)
Instructions
Prepare all necessary entries in general journal form for Garfield Corp
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