Question

(Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances.

	Debit	Credit
Accounts receivables	\(82,000
Allowance for doubtful accounts	\)2,120
Sales revenue		\(430,000

Instructions

Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)

1. To obtain additional cash, Collins factors without recourse \)25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.

2. To obtain a 1-year loan of \(55,000, Collins pledges \)65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.

3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.

4. Based on an aging analysis, an allowance of \(5,800 should be reported. Assume the allowance has a credit balance of \)1,100.

Short answer

Debit balance of allowance is added to the bad debt expenses and credit balance is deducted from the bad debt expenses.

Step-by-step solution

Definition of Finance Charges

The fees charged by the financial institution against the loan provided to the borrower are known as finance charges.

Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
1	Cash	$22,500
	Finance charges$\left(\$25,000\times 10\%\right)$	$2,500
	Accounts receivables		$25,000
	(To record the accounts receivables factored)
2	Cash	$50,600
	Interest expenses$\left(\$55,000\times 8\%\right)$	$4,400
	Note payable		$55,000
	(To record the accounts receivables pledged)
3	Bad Debt expenses$\left(\left(\$82,000\times 5\%\right)+\$2,120\right)$	$6,220
	Allowance for doubtful accounts		$6,220
	(To record the allowance maintained by the business entity)
4	Bad debt expenses	$4,700
	Allowance for doubtful accounts$\left(\$5,800-\$1,100\right)$		$4,700
	(To record the allowance made for receivables)