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(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

Step by step solution

01

Definition of Forfeiting Discount

Under the net method of recording discounting terms, a business entity adds back the discount to the amount of receivables if the payment is not made within the discounted period. Such a process of increasing receivables is known as forfeiting discount.

02

Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
July 1	Accounts receivables (net of 2% discount)	$7,840
	Sales revenue		$7,840
July 5	Cash	$8,190
	Loss on Sale of receivable	$810
	Accounts receivables (net of 2% discount)		$8,820
	Sales discount forfeited		$180
July 9	Accounts receivable	$180
	Sales discount forfeited		$180
July 9	Cash	$5,640
	Interest expenses (@ 6% of $6,000)	$360
	Note payable		$6,000
July 11	Accounts receivable (@ 2% of 8,000)	$160
	Sales discount forfeited		$160
Dec 29	Allowance for doubtful accounts	$7,200
	Accounts receivables (90% of $8,000)		$7,200
		$30,380	$30,380

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