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Chapter 7: Question E7-21 (page 368)

(Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling \(25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is \)1,200.

Instructions

(a) Prepare the journal entry to record the sale of the receivables.

(b) Compute Jones’s accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.

Short Answer

Expert verified

The business entity incurs a loss of $2,200 on the sale of receivables.

Step by step solution

01

Definition of Creditors

The individual or business lending cash or from whom the business entity has purchased goods on credit are creditors.

02

Journal Entry to Record the Sale of Receivable

Date

Accounts and Explanation

Debit $

Credit $

Cash

$22,750

Due from factor

$1,250

Loss on sale

$2,200

Resource liability

$1,200

Account receivables

$25,000

Working note:

Computation of cash received:

Particular

Amount $

Accounts receivable

$25,000

Less: Due from factor$25,000×5%

($1,250)

Less: Finance charges$25,000×4%

($1,000)

Cash received

$22,750

Add: Due from factors

$1,250

Less: Resource liability

($1,200)

Net proceeds

$22,800

Computation of loss:

Particular

Amount $

Carrying value

$25,000

Less: Net proceeds

($22,800)

Loss on sale

$2,200

03

Accounts Receivables Turnover Ratio

After factoring in receivables, the turnover ratio has declined but had declined less than in the previous part. The collection of receivables is slower, but the business entity can convert them into cash.

Receivable’s turnover:

ReceivablesTurnoverRatio=NetSalesAverageAccountsReceivables=$100,00015,000+$20,0002=$100,000$17,500=5·71times

Days to collect:

DaystoCollectReceivables=365AccountsReceivablesturnoverratio=3655·71=63·92days

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Most popular questions from this chapter

Arness Woodcrafters sells \(250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be \)8,000. Prepare the journal entry for Arness to record the sale.

Presented below is information from Perez Computers Incorporated.

July 1 Sold \(20,000 of computers to Robertson Company with terms 3/15, n/60. Perez uses the gross method to record cash discounts. Perez estimates allowances of \)1,300 will be honored on these sales.

10 Perez received payment from Robertson for the full amount owed from the July transactions.

17 Sold $200,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.

30 The Clark Store paid Perez for its purchase of July 17.

Instructions

Prepare the necessary journal entries for Perez Computers.

What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account of \(600,000 and a commercial checking account balance of \)900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, \(5,000,000.

3. Travel advances of \)180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of \(1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of \)1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of \(190,000.

7. A bank overdraft of \)110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling \(500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2018, in the amount of \)125,000.

10. Eastwood has agreed to maintain a cash balance of \(500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased \)2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700.

Instructions

(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2017.

(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.

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

What are the effects of the sale of the note receivable with recourse on Rolen’s income statement for the year ended December 31, 2017, and its balance sheet at December 31, 2017?

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