Question

GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.

2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2018.

Instructions

Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.

Short answer

The income statement will report interest expenses of$52,320.

Step-by-step solution

Definition of Interest Expenses

The expenses or sacrifices that are incurred against the amount borrowed from any financial institution are known as interest expenses.

Schedule Showing Effect on the Income Statement

Particular	Amount $	Amount $
Assignment on July 1, 2017 $\left[\left(\$400,000-80\%\right)\times 3\%\right]$$\left[\left(\$400,000\times 80\%\right)\times 3\%\right]$		$9,600
Add: Interest expenses prior to 31 Dec 2017		$12,720
Add: Assignment on 1 Dec 2017$\left(\$300,000-\$270,000\right)$		$30,000
Interest expenses		$52,320