Question

Evergreen Company sells lawn and garden products to wholesalers. The company’s fiscal year-end is December 31. During 2021, the following transactions related to receivables occurred:
Feb. 28 Sold merchandise to Lennox, Inc., for $10,000 and accepted a 10%, 7-month note. 10% is an appropriate rate for this type of note.
Mar. 31 Sold merchandise to Maddox Co. that had a fair value of $7,200, and accepted a noninterest-bearing note for which $8,000 payment is due on March 31, 2022.
Apr. 3 Sold merchandise to Carr Co. for $7,000 with terms 2/10, n/30. Evergreen uses the gross method to account for cash discounts.
11 Collected the entire amount due from Carr Co.
17 A customer returned merchandise costing $3,200. Evergreen reduced the customer’s receivable balance by $5,000, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
30 Transferred receivables of $50,000 to a factor without recourse. The factor charged Evergreen a 1% finance charge on the receivables transferred. The sale criteria are met.
June 30 Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 12%. The note was discounted without recourse.
Sep. 30 Lennox, Inc., paid the note amount plus interest to the bank.

Required:
1. Prepare the necessary journal entries for Evergreen for each of the above dates. For transactions involving the sale of merchandise, ignore the entry for the cost of goods sold.
2. Prepare any necessary adjusting entries at December 31, 2021. Adjusting entries are only recorded at year-end.
3. Prepare a schedule showing the effect of the journal entries on 2021 income before taxes

Answer 1

Answer:

Evergreen Company

1. Necessary Journal Entries for Evergreen involving the sale of merchandise:

Feb. 28  Debit Notes Receivable (Lennox Inc.) $10,000

              Credit Sales Revenue $10,000

To record the sale of goods on credit, terms 10% 7-month note.

Mar. 31: Debit Notes Receivable (Maddox Co.) $8,000

             Credit Sales Revenue $7,200

             Credit Interest Receivable $800

To record the sale of goods on credit.

Apr. 3  Debit Accounts Receivable (Carr Co.) $7,000

           Credit Sales Revenue $7,000

To record the sale of goods with terms 2/10, n/30.

Apri. 11 Debit Cash Account $6,860

           Cash Discount Allowed $140

           Credit Accounts Receivable (Carr Co.) $7,000

To record the collection on account.

Apr. 17 Debit Sales Returns $5,000

           Credit Accounts Receivable $5,000

To record the return of goods on account.

Apr. 30 Debit Cash Account $49,500

            Debit Finance Charges $500

            Credit Accounts Receivable $50,000

To record the transfer of receivables to a factor without recourse and 1% finance charge.

June 30 Debit Cash Account $8,800

              Debit Finance Charges $1,200

              Credit Notes Receivable $10,000

To record the discounting of the note at the bank at 12%.

2. Necessary Adjusting Journal Entries at December 31, 2021:

3. A Schedule showing the effect of the journal entries on 2021 income before taxes:

Sales revenue     $10,000

Sales Revenue        7,200

Sales Revenue        7,000

Discount Allowed      (140)

Interest Receivable   800

Sales Returns       (5,000)

Finance charges     (500)

Finance charges   (1,200)

Explanation:

Finance charge of $500 = ($50,000 * 1%). Factoring accounts receivable enables Evergreen to collect on its accounts receivable before the due date.  This usually attracts some finance charges.  Sales without recourse means that the factoring company and not Evergreen accepts the risk associated with credit default.  Sales with recourse implies that Evergreen retains the risk arising from credit default.