(Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling $25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is $1,200.
(a) Prepare the journal entry to record the sale of the receivables.
(b) Compute Jones’s accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.
The business entity incurs a loss of $2,200 on the sale of receivables.
The individual or business lending cash or from whom the business entity has purchased goods on credit are creditors.
Accounts and Explanation
Due from factor
Loss on sale
Computation of cash received:
Less: Due from factor
Less: Finance charges
Add: Due from factors
Less: Resource liability
Computation of loss:
Less: Net proceeds
Loss on sale
After factoring in receivables, the turnover ratio has declined but had declined less than in the previous part. The collection of receivables is slower, but the business entity can convert them into cash.
Days to collect:
(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.
Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.
(Bank Reconciliation and Adjusting Entries) Logan Bruno Company has just received the August 31, 2017, bank statement, which is summarized below.
Country National Bank
Balance August 1
Deposits during August
Note collected for depositor, including $40 interest
Checks cleared during August
Bank service charges
Balance, August 31
The general ledger Cash account contained the following entries for the month of August.
Balance, August 1
Disbursement in August
Receipt during August
Deposits in transit at August 31 are $3,800, and checks outstanding at August 31 total $1,050. Cash on hand at August 31 is $310. The bookkeeper improperly entered one check in the books at $146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.
(a) Prepare a bank reconciliation dated August 31, 2017, proceeding to a correct balance.
(b) Prepare any entries necessary to make the books correct and complete.
(c) What amount of cash should be reported in the August 31 balance sheet?
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