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Chapter 7: Question 18Q (page 362)
Indicate three reasons why a company might sell its receivables to another company.
Business entities are generally involved in selling receivables in situations ofunavailability of credit, non-violation of lending arrangements, and difficulty in collecting receivables.
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(Petty Cash) The petty cash fund of Fonzarelli’s Auto Repair Service, a sole proprietorship, contains the following.
1. Coins and Currency | \(15.20 | |
2. Postage Stamps | 2.90 | |
3. An I.O.U from Cunningham, an employee, for cash advance | 40 | |
4. Check payable to Fonzarelli’s Auto Repair from Pottsie Weber, an employee, marked NSF | 34 | |
5. Vouchers for the following: | ||
Stamps | 20 | |
Two Rose Bowl tickets for Nick Fonzarelli | 170 | |
Printer cartridge | 14.35 | 204.35 |
\)296.45 |
The general ledger account Petty Cash has a balance of $300.
Instructions
Prepare the journal entry to record the reimbursement of the petty cash fund.
Under IFRS, receivables are to be reported on the balance sheet at:
(a) amortized cost.
(b) amortized cost adjusted for estimated loss provisions.
(c) historical cost.
(d) replacement cost.
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.
1. January cash receipts recorded in the December cash book totaled \(45,640, of which \)28,000 represents cash sales, and \(17,640 represents collections on account for which cash discounts of \)360 were given.
2. January cash disbursements recorded in the December check register liquidated accounts payable of \(22,450 on which discounts of \)250 were taken.
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December 31, 2017.
The company uses the periodic method of inventory.
Instructions
(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.
(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:
Debit | Credit | |
Cash | \(39,000 | |
Accounts receivables | 42,000 | |
Inventory | 67,00 | |
Accounts payable | \)45,000 | |
Other Current liabilities | 14,200 |
Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.
Instructions
How should Corrs account for the sale, without recourse, of a February 1, 2017, note receivable sold on May 1, 2017? Why is it appropriate to account for it in this way?
(Notes Receivable with Realistic Interest Rate) On October 1, 2017, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden’s financial statements are prepared on a calendar-year basis.
Instructions
Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.
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