Exercise 1
E.7.13, On April 1, 2004, Rasheed Company assigns $
400,000 of its account receivable to the Third
National Bank as collateral for a $ 200,000 loan due
July 1, 2004. The assignment agreement calls for
Rasheed Company to continue to collect the
receivables. Third National Bank assesses a finance
charge of 2 % of the accounts receivable, and interest
on the loan is 10 % (a realistic rate of interest for a
note of this type).
Instructions :
a. Prepare the April 1, 2004, journal entry for Rasheed
Company.
b. Prepare the journal entry for Rasheed’s collection of
$ 350,000 of the accounts receivable during the
period from April 1, 2004, through June 30, 2004.
c. On July 1, 2004, Rasheed paid Third National all that
was due from the loan it secured on April 1, 2004.
Answer of Exercise 1
(a) Cash
192,000
Finance Charge
8,000*
Notes Payable
200,000
2 % x $ 400,000 = $ 8,000
(b) Cash
350,000
Accounts Receivable 350,000
(c) Notes Payable
200,000
Interest Expense
5,000
Cash
205,000
10 % x $ 200,000 x 3/12 = $ 5,000
Exercise 2
E.7.17
JFK Corp factors $ 300,000, of accounts receivable with
LBJ Finance Corporation on a without recourse basis
on July 1, 2003. The receivables records are
transferred to LBJ Finance, which will receive the
collections. LBJ Finance assesses a finance charge of
1,5 % of the amount of accounts receivable and
retains an amount equal to 4 % of accounts receivable
to cover sales discounts, returns and allowances. The
transaction is to be recorded as a sale.
Instructions :
a. Prepare the journal entry on July 1, 2003, for JFK
Corp to record the sale of receivables without
recourse.
b. Prepare the journal entry on July 1, 2003, for LBJ
Corp to record the purchase of receivables without
recourse.
Answer of Exercise 2
(a) July 1
Cash
$ 283,500
Due from Factor
$ 12,000 */
Loss on Sale of Receivables $
4,500 **/
Accounts Receivable
$ 300,000
* /($12,000 = 4% X $300,000)
**/($4,500 = 1 1/2% X $300,000)
(b) July 1
Accounts Receivable
Due to JFK Corp.
Financing Revenue
Cash
$ 300,000
$ 12,000
$
4,500
$ 283,500
Exercise 3
P.7-5, Presented below is information related to the Accounts Receivable
accounts of Gulistan Inc during the current year 2004.
1. An aging schedule of the accounts receivable as of December 31, 2004,
is as follows.
Age
Net debit balance
Under 60 days
$ 172,342
61 - 90 days
136,490
91 – 120 days
39,924
Over 120 days
_
23,644
$ 372,400
% to be Applied after
Correction is made
1%
3%
6%
$ 4,200 definitely uncollectible, estimated
remainder uncollectible is 25 %
2. The accounts receivable control account has a debit balance of $
372,400 on December 31, 2004.
3. Two entries were made in the bad debt expense account during the year
(a) a debit on December 31 for the amount credited to Allowance for
Doubtful Accounts, and (b) a credit for $ 2,740 on November 3, 2004,
and a debit to Allowance for Doubtful Accounts because a bankruptcy.
Exercise 3
4. The Allowance for Doubtful accounts is as follows for 2004.
_
Allowance for Doubtful Accounts
Debit
Credit
Nov 3, Uncollectible accounts
Jan 1, Beginning balance
Written off
2,740 Dec 31, 5 % of $ 372,400
_
8,750
18,620
5. A credit balance exists in the accounts receivable (61-90 days) of
$ 4,840, which represents an advance on a sales contract.
Instructions :
Assuming the books have not been closed for 2004, make the
necessary correcting entries.
Answer of Exercise 3
Bad Debt Expense
Accounts Receivable
2,740.00
Accounts Receivable
Advance on Sales Contract
Allowance for Doubtful Accounts
Accounts Receivable
Allowance for Doubtful Accounts
Bad Debt Expense
2,740.00
4,840.00
4,840.00
4,200.00
4,200.00
7,374.64
Balance ($ 8,750 + $ 18,620 – $ 2,740 – $ 4,200)
Corrected balance
Adjustment
Age
Under 60 days
61-90 days
91-120 days
Over 120 days
7,374.64
$ 20,430.00
13,055.36
$ 7,374.64
Balance
Aging Schedule
$ 172,342
1%
$ 1,723.42
141,330 ($ 136,490 + $ 4,840)
3%
4,239.90
37,184 ($ 39,924 – $ 2,740)
6%
2,231.04
19,444 ($ 23,644 – $ 4,200)
25%
4,861.00
$ 13,055.36
Answer of Exercise 3
If the write off entry not the $ 4,200, the following would change in the
problem.
Balance ($ 8,750 + $ 18,620 – $ 2,740)
$ 24,630.00
Corrected balance
17,255.36
Adjustment
$ 7,374.64
Age
Under 60 days
61-90 days
91-120 days
Over 120 days
Balance Aging Schedule
$ 172,342
1%
$ 1,723.42
141,330
3%
4,239.90
37,184
6%
2,231.04
23,644
—
9,061.00*
$ 17,255.36
*[$ 4,200 + (25 % x $ 19,444) = 9,061]