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Chapter 7: Question: E7-14 (page 367)

(Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2017, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.

Instructions

(a) Prepare the journal entry to record the transaction of December 31, 2015, for the Ed Abbey Co.

(b) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

(c) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2017.

Short Answer

Expert verified

The discount on the note is equal to$165,290.

Step by step solution

01

Definition of Fiscal Year

Period of one year that is used by a business entity or individual for reporting their financial transactions for tax purposes is known as fiscal year. For example,1st April 2019- 31st March 2020.

02

Journal entry for 31 December 2015

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2015

Note receivables

$200,000

Discount on note receivable

$200,00011+102

$165,290

Service revenue

$34,710

03

Journal entry for 31 December 2016

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2016

Discount on note receivable

$165,290×10%

$16,529

Interest revenue

$16,259

04

Journal entry for 31 December 2017

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Discount on note receivable$165,290+$16,529×10%

$18,182

Interest revenue

$18,182

31 Dec 2017

Cash

$200,000

Note receivable

$200,000

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Most popular questions from this chapter

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?

(Bank Reconciliation and Adjusting Entries) Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.

June 30 Bank Reconciliation Statement

Balance per bank

\(7,000

Add: Deposit in transit

1,540

Less: Outstanding checks

(2,000)

Balance per books

\)6,540

Month of July Results

Per Bank

Per Books

Balance July 31

\(8,650

\)9,250

July Deposits

5,000

5,810

July Checks

4,000

3,100

July note collected (not included in July deposits)

1,000

-

July bank service charge

15

-

July NSF check from a customer, returned by the bank (recorded by bank as a charge)

335

-

Instructions

(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.

(b) Prepare the general journal entry or entries to correct the Cash account.

Answer

Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.

Instructions

(a) What are the deficiencies of the direct write-off method?

(b) Briefly describe the allowance method to estimate bad debts and the theoretical justification for its use?

(c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?

Recent financial statements of General Mills, Inc. report net sales of \(12,442,000,000. Accounts receivable are \)912,000,000 at the beginning of the year and $953,000,000 at the end of the year. Compute General Mills’ accounts receivable turnover. Compute General Mills’ average collection period for accounts receivable in days.

Under IFRS:

(a) the entry to record estimated uncollected accounts is the same as GAAP.

(b) loans and receivables should only be tested for impairment as a group.

(c) it is always acceptable to use the direct write-off method.

(d) all financial instruments are recorded at fair value.
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