Chapter 7: Question E7-17 (page 368)
(Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of \(200,000 to Joffrey Company for \)160,000 on a with recourse basis.
Loss on sale of receivables equals$41,000.
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Jim Carrie Company shows a balance of \(181,140 in the Accounts Receivable account on December 31, 2017. The balance consists of the following.
Installment accounts due in 2018 | \)23,000 |
Installment accounts due after 2018 | 34,000 |
Overpayment to vendors | 2,640 |
Due from regular customers, of which $40,000 represents account pledge as security for a bank loan | 79,000 |
Advances to employees | 1,500 |
Advance to the subsidiary company (due in 2018) | 81,000 |
Instructions
Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on December 31, 2017.
Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.
1. January cash receipts recorded in the December cash book totaled \(45,640, of which \)28,000 represents cash sales, and \(17,640 represents collections on account for which cash discounts of \)360 were given.
2. January cash disbursements recorded in the December check register liquidated accounts payable of \(22,450 on which discounts of \)250 were taken.
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December 31, 2017.
The company uses the periodic method of inventory.
Instructions
(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.
(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:
Debit | Credit | |
Cash | \(39,000 | |
Accounts receivables | 42,000 | |
Inventory | 67,00 | |
Accounts payable | \)45,000 | |
Other Current liabilities | 14,200 |
Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company— none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
(Receivables Management) As the manager of the accounts receivable department for Beavis Leather Goods, Ltd., you recently noticed that Kelly Collins, your accounts receivable clerk who is paid \(1,200 per month, has been wearing unusually tasteful and expensive clothing. (This is Beavis’s first year in business.) This morning, Collins drove up to work in a brand new Lexus.
Naturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance of \)192,000 as shown in the ledger. The following information is available for your first year (precisely 9 months ended September 30, 2017) in business.
(1) Collection from Customers | $188,000 |
(2) Merchandise Purchased | 360,000 |
(3) Ending merchandise inventory | 90,000 |
(4) Goods are marked to sell ay 40% above cost. |
Instructions
Assuming all sales were made on account, compute the ending accounts receivable balance that should appear in the ledger, noting any apparent shortage. Then, draft a memo dated October 3, 2017, to Mark Price, the branch manager, explaining the facts in this situation. Remember that this problem is serious, and you do not want to make hasty accusations.
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