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Chapter 7: 13BE (page 364)

Use the information presented in BE7-12 for Arness Woodcrafters but assume that the recourse liability has a fair value of \(4,000, instead of \)8,000. Prepare the journal entry and discuss the effects of this change in the value of the recourse liability on Arness’s financial statements.

Short Answer

Expert verified

Reduction in resource liability willreduce the liability and lossfor the business entity.

Step by step solution

01

Definition of Financial Statements

All the schedules reflecting the business transaction summary that occurred during a financial period are known as financial statements. It reports only transactions of financial nature.

02

Journal Entries for Arness

Date

Accounts and Explanation

Debit $

Credit $

Cash

$227,500

Loss on sale of receivables$250,000×5%+4,000

$16,500

Due from Factor$250,000×4%

$10,000

Accounts receivables

$250,000

Resource liability

$4,000

03

Effect of Change in Value of the Resource Liability

  1. Change in the resource liability reported on the financial statement. It will reflect a reduction in the value.
  2. Loss on sale will also reduce on the income statement.

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Most popular questions from this chapter

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.

Use the information presented in BE7-16 for Horton Corporation. Prepare any entries necessary to make Horton’s accounting records correct and complete.

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s 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?

What are the basic problems that occur in the valuation of accounts receivable?

(Expected Cash Flows) On January 1, 2017, Botosan Company issued a \(1,200,000, 5-year, zero-interest bearing note to National Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2018 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2018, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only \)800,000 of the principal at maturity.

Instructions

(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2017. (Round to the nearest $10.)

(b) Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.

(c) Under what circumstances can National Organization Bank consider Botosan’s note to be impaired?

(d) Compute the loss National Organization Bank will suffer from Botosan’s financial distress on December 31, 2018. What journal entries should be made to record this loss?
See all solutions

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