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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

When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?

Use the information presented in BE7-5 for Wilton, Inc.

(a) Instead of an Allowance for Doubtful Accounts Balance of \(2,400 credit, the balance was \)1,900 debit. Assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expenses.

(b) Instead of estimating uncollectible based on a percentage of receivables, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at \(24,600. (Assume an allowance of \)2,400 credit.) Prepare the entry to record bad debt expenses.

BE7-5 (L03) Wilton, Inc. had net sales in 2017 of \(1,400,000. At December 31, 2017, before adjusting entries, the balances in selected accounts were Accounts Receivable \)250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 8% of its receivables will prove to be uncollectible, prepare the December 31, 2017, journal entry to record bad debt expense.

(Analysis of Receivables) Presented below is information for Jones Company.

1. Beginning-of-the-year Accounts Receivable balance was \(15,000.

2. Net sales (all on account) for the year were \)100,000. Jones does not offer cash discounts.

3. Collections on accounts receivable during the year were $70,000.

Instructions

(a) Prepare (summary) journal entries to record the items noted above.

(b) Compute Jones’s accounts receivable turnover and days to collect receivables for the year. The company does not believe it will have any bad debts.

(c) Use the turnover ratio computed in (b) to analyze Jones’s liquidity. The turnover ratio last year was 6.0

(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.

What are the basic problems that occur in the valuation of accounts receivable?
See all solutions

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