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Question E7-19

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Intermediate Accounting (Kieso)
Found in: Page 368

Short Answer

(Transfer of Receivables without Recourse) JFK Corp. factored $300,000 of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2017. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1½% 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, 2017, for JFK Corp. to record the sale of receivables without recourse.

(b) Prepare the journal entry on July 1, 2017, for LBJ Finance Corporation to record the purchase of receivables without recourse.

Seller of Accounts receivables generates a loss of $4,500

See the step by step solution

Step by Step Solution

Definition of Bad Debts

The amount due from customers that prove or are estimated to be uncollectible is reported as bad debt expenses by the business entity.

Journal Entries for Sale of Receivables Without Resource

Date

Accounts and Explanation

Debit $

Credit $

1 July

Cash

$283,500

Due from Factor

$12,000

Loss on sale

$4,500

Accounts receivables

$300,000

Journal Entries for Purchase of Receivables Without Resource

Date

Accounts and Explanation

Debit $

Credit $

1 July

Account receivable

$300,000

Due to JKF Corp

$12,000

Interest revenue

$4,500

Cash

$283,500

Most popular questions for Business-studies Textbooks

From inception of operations to December 31, 2017, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. The provisions are recorded, based on analyses of customers with different risk characteristics. Bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days.

The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2017. During 2017, credit sales totalled $9,000,000, the provision for doubtful accounts was determined to be $180,000, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Fortner installed a computer system in November 2017, and aging of accounts receivable was prepared for the first time as of December 31, 2017. A summary of the aging is as follows.

Classification by month of sale

Balance in each category

Estimated % uncollectible

November-December 2017

$1,080,000

2%

July-October

650,000

10%

January-June

420,000

25%

Prior to 1/1/17

150,000

80%

$2,300,000

Based on the review of collectibility of the account balances in the “prior to 1/1/17” aging category, additional receivables totaling $60,000 were written off as of December 31, 2017. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2017, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

Instructions

(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2017. Show supporting computations in good form. (Hint: In computing the 12/31/17 allowance, subtract the $60,000 write-off.)

(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2017.

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