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Chapter 7: Question E7-17 (page 368)
(Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of \(200,000 to Joffrey Company for \)160,000 on a with recourse basis.
Loss on sale of receivables equals$41,000.
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Indicate three reasons why a company might sell its receivables to another company.
Discuss the accounting for sales allowances and how they relate to the concept of variable consideration.
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?
Jim Carrie Company shows a balance of \(181,140 in the Accounts Receivable account on December 31, 2017. The balance consists of the following.
Installment accounts due in 2018 | \)23,000 |
Installment accounts due after 2018 | 34,000 |
Overpayment to vendors | 2,640 |
Due from regular customers, of which $40,000 represents account pledge as security for a bank loan | 79,000 |
Advances to employees | 1,500 |
Advance to the subsidiary company (due in 2018) | 81,000 |
Instructions
Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on December 31, 2017.
(Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.
Date | Customer | Amount \( |
March 31 | E.L Masters Company | \)7,800 |
June 30 | Stephen Crane Associates | 6,700 |
September 30 | Amy Lowell’s Dress Shop | 7,000 |
December 31 | R. Frost. Inc | 9,830 |
Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.
All of Dickinson’s sales are on a 30-day credit basis. Sales for the current year total \(2,200,000. The balance in Accounts Receivable at year-end is \)77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).
Instructions
(a) Do you agree or disagree with Dickinson’s policy concerning recognition of bad debt expense? Why or why not?
(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?
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