Chapter 7: Question 12Q (page 362)
Explain how accounting for bad debts can be used for earnings management.
Companies can manage their earnings byover and underestimating the bad debts expenses.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.
1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt’s books at a cost of \(590,000.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).
Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
Instructions
Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.
(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
Milner Family Importers sold goods to Tung Decorators for \(30,000 on November 1, 2017, accepting Tung’s \)30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest.
(Transfer of Receivables with Recourse) Beyoncé Corporation factors \(175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2017. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.
Instructions
(a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?
(b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2017, for Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of \)2,000.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
