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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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(Assigning Accounts Receivable) On April 1, 2017, Rasheed Company assigns \(400,000 of its accounts receivable to the Third National Bank as collateral for a \)200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).
Instructions
(a) Prepare the April 1, 2017, journal entry for Rasheed Company.
(b) Prepare the journal entry for Rasheed’s collection of $350,000 of the accounts receivable during the period from April 1, 2017, through June 30, 2017.
(c) On July 1, 2017, Rasheed paid Third National all that was due from the loan it secured on April 1, 2017. Prepare the journal entry to record this payment.
(Transfer of Receivables without Recourse) JFK Corp. factored $300,000 of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2017. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1½% of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.
Instructions
(a) Prepare the journal entry on July 1, 2017, for JFK Corp. to record the sale of receivables without recourse.
(b) Prepare the journal entry on July 1, 2017, for LBJ Finance Corporation to record the purchase of receivables without recourse.
On September 30, 2016, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.
After receiving the first of two equal annual installments on September 30, 2017, Rolen immediately sold the note with recourse. On October 9, 2018, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.
Instructions
(c) How should Rolen account for the effects of the note being dishonored?
Finman Company designated Jill Holland as petty cash custodian and established a petty cash fund of \(200. The fund is reimbursed when the cash in the fund is at \)15, which it is. Petty cash receipts indicate funds were disbursed for office supplies \(94 and miscellaneous expense \)87. Prepare journal entries for the establishment of the fund and the reimbursement.
What are two methods of recording accounts receivable transactions when a cash discount situation is involved? Which is more theoretically correct? Which is used in practice more of the time? Why?
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