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Chapter 7: Question: BE7-7 (page 363)

Milner Family Importers sold goods to Tung Decorators for \(30,000 on November 1, 2017, accepting Tung’s \)30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest.

Short Answer

Expert verified

The debit and credit column of the journal totals$61,200.

Step by step solution

01

Definition of Adjusting Entry

Journal entry prepared by the business entity for updating balances of some temporary accounts is known as adjusting entry. It is generally prepared for deferral and accruals.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

1 Nov 2017

Note receivable

$30,000

Sales revenue

$30,000

31 Dec 2017

Interest receivable

$300

Interest revenue

$30,000×6%×212

$300

1 May 2018

Cash

$30,900

Interest receivable

$300

Interest revenue

$30,000×6%×412

$600

Note receivable

$30,000

$61,200

$61,200

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Most popular questions from this chapter

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.

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

(a) How should Moresan determine the interest revenue for 2017 on the:

(1) Interest-bearing note receivable? Why?

(2) Zero-interest-bearing note receivable? Why?

Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.

GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.

2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2018.

Instructions

Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.

What is the accounts receivable turnover, and what type of information does it provide?
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