Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 6, Problem 15P

Comprehensive Receivables Problem Blackmon Corporation’s December 31, 2018, balance sheet disclosed the following information relating to its receivables:

Chapter 6, Problem 15P, Comprehensive Receivables Problem Blackmon Corporations December 31, 2018, balance sheet disclosed , example  1

*The company has a recourse liability of $700 related to a note receivable sold to a bank.

During 2019, credit sales (terms, n/EOM) totaled $2,200,000, and collections on accounts receivable (unassigned) amounted to $1,900,000. Uncollectible accounts totaling $18,000 from several customers were written off, and a $1,350 accounts receivable previously written off was collected. Additionally, the following transactions relating to Blackmon’s receivables occurred during the year:

Chapter 6, Problem 15P, Comprehensive Receivables Problem Blackmon Corporations December 31, 2018, balance sheet disclosed , example  2

On December 31, 2019, an aging of the accounts receivable balance indicated the following:

Chapter 6, Problem 15P, Comprehensive Receivables Problem Blackmon Corporations December 31, 2018, balance sheet disclosed , example  3

Required:

  1. 1. Prepare the journal entries to record the preceding receivable transactions during 2019 and the necessary adjusting entry on December 31, 2019. Assume a 360-day year for interest calculations and round calculations to the nearest dollar.
  2. 2. Prepare the receivables portion of Blackmon’s December 31, 2019, balance sheet.
  3. 3. Next Level Compute Blackmon’s accounts receivable turnover in days, assuming a 360-day business year. What is your evaluation of its collection policies?
  4. 4. If Blackmon uses IFRS, what might be the heading of the section for the receivables reported in Requirement 2?

1.

Expert Solution
Check Mark
To determine

Journalize the entries to record the previous receivables transaction and prepare the necessary adjusting entry on December 31, 2019.

Explanation of Solution

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Prepare journal entries:

DateAccount Title and ExplanationDebitCredit
 Accounts receivable$2,200,000 
      Sales revenue $2,200,000
 (To record the sale on credit)  

Table (1)

DateAccount Title and ExplanationDebitCredit
 Cash $1,900,000 
      Accounts receivable $1,900,000
 ( To record payment received)  

Table (2)

DateAccount Title and ExplanationDebitCredit
 Allowance for doubtful accounts$18,000 
      Accounts receivable $18,000
 (To record accounts receivables written- off)  

Table (3)

DateAccount Title and ExplanationDebitCredit
 Accounts receivable$1,350 
      Allowance for doubtful accounts $1,350
 (To record accounts receivables written- off)  

Table (4)

DateAccount Title and ExplanationDebitCredit
March 6Cash$1,350 
           Accounts receivable  $1,350
      (To record cash collected on accounts)  

Table (5)

DateAccount Title and ExplanationDebitCredit
March 6Cash$12,460 
      Notes  receivable  $12,000
      Interest income $460
      (To record the cash collected from notes receivable along with interest)  

Table (6)

DateAccount Title and ExplanationDebitCredit
March 31Recourse liability$700 
           Gain from sale of note $700
      (To record the fair value of recourse liability)  

Table (7)

DateAccount Title and ExplanationDebitCredit
May 1Notes Receivable$4,800 
        Accounts receivable   $4,800
      (To record the notes receivable)  

Table (8)

DateAccount Title and ExplanationDebitCredit
May 18Notes receivable$6,900 
          Sales revenue $6,900
      (To record the receipt of the interest bearing note)  

Table (10)

DateAccount Title and ExplanationDebitCredit
June 2Cash ($4,836.62(1)+$6,899.71(6))$11,736 
 

Loss from sale of receivable

($668.85(1)+$934.79(6))

$1,603 
      Notes receivable ($4,800(1)+$6,900(6))  $11,700
      Interest income ($55.47(1)+$34.50(6))  $89.97
      Recourse liability $1,550
      (To record the factoring of accounts receivable)  

Table (11)

Note: For the values of amount refer to Table (26) and Table (27)

DateAccount Title and ExplanationDebitCredit
July 1Cash (balancing figure)$114,000 
 Assignment service charge expense$5,000 
          Notes payable (11) $119,000
      (To record the assignment service charge expense)  

Table (12)

DateAccount Title and ExplanationDebitCredit
July 1Accounts receivable assigned140,000 
          Accounts receivables 140,000
      ( To record the remaining accounts owed)  

Table (13)

DateAccount Title and ExplanationDebitCredit
July 6Return liability2,500 
          Accounts receivable assigned 2,500
      (To record the return liability of accounts receivable assigned)  

Table (14)

DateAccount Title and ExplanationDebitCredit
July 13Return liability800 
          Accounts receivable assigned 800
      (To record the return liability of accounts receivable assigned)  

Table (15)

DateAccount Title and ExplanationDebitCredit
July 31Cash50,000 
          Accounts receivable assigned 50,000
      (To record the receipt of accounts receivable assigned)  

Table (16)

DateAccount Title and ExplanationDebitCredit
July 31Notes payable50,000 
 Interest expense (12)1,785 
      Cash 51,785
      (To record the interest expense on notes payable)  

Table (17)

DateAccount Title and ExplanationDebitCredit
August 31Cash60,000 
          Accounts receivable assigned 60,000
     (To record the receipt of cash)  

Table (18)

DateAccount Title and ExplanationDebitCredit
August 31Notes payable (15)69,000 
  Interest expense (13)1,035 
      Cash 70,035
      (To record the interest expense on notes payable)  

Table (19)

DateAccount Title and ExplanationDebitCredit
August 31Accounts receivable26,700 
          Accounts receivable assigned 26,700
      (To record the accounts receivable assigned)  

Table (20)

Note: $26,700=$140,000$2,500$800$50,000$60,000

DateAccount Title and ExplanationDebitCredit
August 31Recourse liability900 
          Gain from sale of notes 900
     (To record the fair value of recourse liability)  

Table (21)

DateAccount Title and ExplanationDebitCredit
September 1Notes receivable dishonored4,383 
 Recourse liability650 
      Cash (14) 5,033
      (To record the notes dishonored)  

Table (22)

DateAccount Title and ExplanationDebitCredit
September 4Cash (14)5,033 
          Notes receivables dishonored 4,383
          Gain from collection of dishonored note 650
      (To record the )  

Table (23)

DateAccount Title and ExplanationDebitCredit
December 31Cash5,000 
         Interest income  5,000
      (To record the interest income)  

Table (24)

DateAccount Title and ExplanationDebitCredit
December 31

Bad debt expense

($16,205(15)+$1,650)

17,855 
          Allowance for doubtful accounts 17,855
      (To record the bad debt expenses of the period)  

Table (25)

Working note:

(1) Calculate the amount of loss from receivable:

ParticularsAmount ($)
Face value of the note4,800
Interest to maturity (2)208
Maturity value of note5,008
Less: Discount (3)(171.38)
Proceeds4,836.62
Less: Book value of note (4)(4,855.47)
Recourse liability(650)
Loss from sale of receivable(668.85)

Table (26)

(2) Calculate the interest to maturity:

Interesttomaturity=(NotereceivableonMay1×Percentageofinterest×Timeperiod)=$4,800×13%×120days360days=$624×120days360days=$208

(3) Calculate the amount of discount:

Discount=(Maturityvalueofnote×percentageofinterest×Timeperiod)=$5,008×14%×(88360days)=$701.12×88360days=$171.38

Note: 88 days is calculated by subtracting 120 days from 32 days (May 1 to June 2).

(4) Calculate the book value of note:

Bookvalueofnote}=(Notereceivable+Accruedinterestincome)=$4,800+$55.47(5)=$4,855.47

(5) Calculate accrued interest income:

Accruedinterestincome}=(NotereceivedonMay 1×Percentageofinterestrate×Timeperiod)=$4,800×13%×32days360days=$624×20days360days=$55.47

Note: 20 days is calculated from November 1 to November 20.

(6) Calculate the amount of loss from receivable of Company E:

ParticularsAmount ($)
Face value of the note6,900
Interest to maturity (7)207
Maturity value of note7,107
Less: Discount (8)(207.29)
Proceeds6,899.71
Less: Book value of note (9)(6,934.50)
Recourse liability(900)
Loss from sale of receivable(934.79)

Table (27)

(7) Calculate the interest to maturity:

Interesttomaturity=(NotereceivableonMay18×Percentageofinterest×Timeperiod)=$6,900×12%×90days360days=$828×120days360days=$207

(8) Calculate the amount of discount:

Discount=(Maturityvalueofnote×percentageofinterest×Timeperiod)=$7,107×14%×(75360days)=$994.98×75360days=$207.29

Note: 75 days is calculated by subtracting 90 days from 15 days (May 18 to June 2).

(9) Calculate the book value of note:

Bookvalueofnote}=(Notereceivable+Accruedinterestincome)=$6,900+$34.50(10)=$6,934.50

(10) Calculate accrued interest income:

Accruedinterestincome}=(NotereceivedonMay 18×Percentageofinterestrate×Timeperiod)=$6,900×12%×15days360days=$828×20days360days=$34.50

Note: 20 days is calculated from November 1 to November 20.

(11) Calculate the advance amount of accounts receivable:

Advanceamountofaccountsreceivableassigned}=(Totalaccountsreceivableassigned×Percentageofadvanceamountofaccountsreceivableassigned)=$140,000×85%=$119,000

(12) Calculate the amount of interest expense on July 31:

InterestExpense=(Advanceamountofaccountsreceivableassigned×Percentageofinterest)=$119,000×1.5%=$1,785

(13) Calculate the interest expense on August 31:

InterestExpense=(Amountofaccountsreceivableassigned×Percentageofinterest)=$69,000×1.5%=$1,035

(14) Calculate the amount of cash on September 1:

Cash=[Notesreceivable+(Notesreceivables×Percentageofinterest×Timeperiod)+Charges]=$4,800+($4,800×13%×120360)+$25=$4,800+$208+$25=$5,033

(15) Calculate the amount of cash on August 1:

Cash=(AdvanceamountofaccountsreceivableassignedAssignedaccountscollected)=$119,000(11)$50,000=$69,000

2.

Expert Solution
Check Mark
To determine

Prepare the receivable portion of Company B as on December 31, 2019.

Explanation of Solution

Receivables portion of Company B is prepared as follows:

ParticularsAmountAmount
Accounts receivables (16)$408,900  
Less: Allowance for doubtful accounts  (16)($16,205) 
     $392,695
Notes receivables $38,000
Total receivables $430,695

Table (28)

Working note:

(16) Calculate the estimated total amount of uncollectible:

AgeAmount (a)Estimated Percentage uncollectible (b)Estimated amount of uncollectible (c)=(a)×(b)
Under 30 days$240.487 0.5%1,202
30–60 days $113,421 1.5%1,701
61–90 days $30,9338.0%2,475
91–240 days $17,185 35%6,015
Over 240 days$6,874 70%4,812
 $408,900 $16,205

Table (29)

3.

Expert Solution
Check Mark
To determine

Calculate the accounts receivable turnover in days and analyze its collection policy.

Explanation of Solution

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In other words, it indicates the number of times the average amount of net accounts receivables collected during a particular period.

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average.

Calculate the receivables turnover in days:

Receivablesturnoverindays)=365Accounts receivable turnover=3657.07 times(17)=51 days

The receivables turnover in days for Corporation B is 51 days and it seems to be slow, therefore, the company must be very violent in its collection policies.

Working note:

(17) Compute the receivables turnover ratio:

Accountsreceivableturnoverratio}=NetsalesonaccountAverageaccountsreceivable(net)=$2,200,000$311,348(18)=7.07times

(18) Calculate average accounts receivable (net):

Averageaccountsreceivable(net)}=[(BalanceinaccountsreceivableAllowancefordoubtfulaccounts)+Netaccountsreceivable]2=($408,900$16,205)+230,0002=$622,6952=$311,348

4.

Expert Solution
Check Mark
To determine

State the heading for the accounts receivable section in requirement 2, if Company B uses IFRS.

Explanation of Solution

“Loans and Receivables” can be used as the heading for the accounts receivables section, if Company B uses IFRS.

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Chapter 6 Solutions

Intermediate Accounting: Reporting And Analysis

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