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.
