7 Cash and Receivables EXERCISES 7.2
E7-17 (L06) (Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of $200,000 to Joffrey Company for $160,000 on a with recourse basis.
Instructions
The recourse provision has a fair value of $1,000. This transaction should be recorded as a sale. Prepare the appropriate journal entry to record this transaction on the books of Ames Quartet Inc.
E7-18 (L06) (Transfer of Receivables with Recourse) Beyoncé Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2017. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.
Instructions
(a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?
(b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2017, for Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.
E7-19 (L06) (Transfer of Receivables without Recourse) JFK Corp. factors $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.
E7-20 (L07) (Analysis of Receivables) Presented below is information for Jones Company.
1. Beginning-of-the-year Accounts Receivable balance was $15,000.
2. Net sales (all on account) for the year were $100,000. Jones does not offer cash discounts.
3. Collections on accounts receivable during the year were $70,000.
Instructions
(a) Prepare (summary) journal entries to record the items noted above.
(b) Compute Jones’s accounts receivable turnover and days to collect receivables for the year. The company does not believe it will have any bad debts.
(c) Use the turnover ratio computed in (b) to analyze Jones’s liquidity. The turnover ratio last year was 6.0.
E7-21 (L06,7) (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.
Instructions
(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.
*E7-22 (L08) (Petty Cash) Carolyn Keene, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April.
1. On April 1, it established a petty cash fund in the amount of $200.
2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows.
Delivery charges paid on merchandise purchased $60.00
Supplies purchased and used 25.00
Postage expense 33.00
I.O.U. from employees 17.00
Miscellaneous expense 36.00
The petty cash fund was replenished on April 10. The balance in the fund was $27.
3. The petty cash fund balance was increased $100 to $300 on April 20.
Instructions
Prepare the journal entries to record transactions related to petty cash for the month of April.
* E7-23 (L08) (Petty Cash) The petty cash fund of Fonzarelli’s Auto Repair Service, a sole proprietorship, contains the following.
1. Coins and currency $ 15.20
2. Postage stamps 2.90
3. An I.O.U. from Richie Cunningham, an employee, for cash advance 40.00
4. Check payable to Fonzarelli’s Auto Repair from
Pottsie Weber, an employee, marked NSF 34.00
5. Vouchers for the following:
Stamps $ 20.00
Two Rose Bowl tickets for Nick Fonzarelli 170.00
Printer cartridge 14.35 204.35 $296.45
The general ledger account Petty Cash has a balance of $300.
Instructions
Prepare the journal entry to record the reimbursement of the petty cash fund.
* E7-24 (L08) (Bank Reconciliation and Adjusting Entries) Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.
June 30 Bank Reconciliation
Balance per bank $ 7,000
Add: Deposits in transit 1,540
Deduct: Outstanding checks (2,000)
Balance per books $ 6,540
Month of July Results
Per Bank Per Books
Balance July 31 $8,650 $9,250
July deposits 5,000 5,810
July checks 4,000 3,100
July note collected (not included in July deposits) 1,000 —
July bank service charge 15 —
July NSF check from a customer, returned by the bank 335 —
(recorded by bank as a charge)
Instructions
(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.
(b) Prepare the general journal entry or entries to correct the Cash account.
* E7-25 (L08) (Bank Reconciliation and Adjusting Entries) Logan Bruno Company has just received the August 31, 2017, bank statement, which is summarized below.
County National Bank Disbursements Receipts Balance
Balance, August 1 $ 9,369
Deposits during August $32,200 41,569
Note collected for depositor, including $40 interest 1,040 42,609
Checks cleared during August $34,500 8,109
Bank service charges 20 8,089
Balance, August 31 8,089
The general ledger Cash account contained the following entries for the month of 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.
Instructions
(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?
*E7-26 (L09) (Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.
Instructions
(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.
(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.
*E7-27 (L09) (Expected Cash Flows) On December 31, 2017, Conchita Martinez Company signed a $1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2019, Sauk City Bank determined that it was probable that the company would pay back only $600,000 of the principal at maturity.
However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan.
Instructions
(a) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2017.
(b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2019.
(c) Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2019.
