Chapter 6, Problem 14E

1.

To determine

(a) Prepare journal entry to record the given transactions by assuming that Company W is using U.S GAAP.

(b) Specify the manner by which the given  agreement will be reported on Company W’s  December 31, 2016, balance  sheet by assuming that note is payable in short term.

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.

(a) Prepare journal entry to record the given transactions by assuming that Person W is using U.S GAAP.

Date	Account Titles and explanation	Debit ($)	Credit ($)
December 1,2016	Cash  (2)	126,400
	Assignment service charge expense  (1)	1,600
	Notes payable $\left(\$160,000\times 80\%\right)$		128,000
	(To record transfer  of accounts receivable)

Table (1)

• Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $126,400.
• Assignment service charge expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the assignment service charge expense by $1,600.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $128,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
December 1,2016	Accounts receivable assigned	160,000
	Accounts receivable		160,000
	(To record the  transfer of accounts receivable to accounts receivable assigned account)

Table (2)

• Accounts receivable assigned is an asset and there is an increase in the value of an asset. Hence, debit account receivable assigned account by $160,000.
• Accounts receivable is an asset and there is a decrease in the value of an asset. Hence, credit the account receivable account by $160,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
December 11,2016	Return liability	1,000
	Accounts receivable assigned		1,000
	(To record the sales returns on credit  merchandise)

Table (3)

• Return liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $1,000.
• Accounts receivable assigned is an asset and there is a decrease in the value of asset. Hence, credit the asset by $1,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
December 31,2016	Cash	86,000
	Accounts receivable assigned		86,000
	(To record the cash collected on transfer of  accounts receivable)

Table (4)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $86,000.
• Accounts receivable assigned is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable assigned by $86,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
December 31,2016	Notes payable	86,000
	Interest expense $\left(\$128,000\times 12\%\times \frac{1}{12}\right)$	1,280
	Cash		87,280
	(To record the interest collected on transfer of  accounts receivable)

Table (5)

• Notes payable is a liability and there is a decrease in the value of liability. Hence, debit the notes payable by $86,000.
• Interest expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the interest expense by $1,280.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $87,280.

Working notes:

(1) Calculate the Assignment service charges expense:

$\begin{array}{c}\text{Asssignment of service charge expense =}\left(\begin{array}{l}\text{Accounts}\text{receivables}\text{×}\text{Percentage}\text{commission}\text{on}\\ \text{the}\text{gross}\text{amount}\text{of}\text{receivables}\text{transferred}\end{array}\right)\\ \text{=\$160,000×1\%}\\ \text{=\$1,600}\end{array}$

(2) Calculate the amount of cash:

$\begin{array}{c}\text{Cash=}\left[\begin{array}{l}\left(\text{Accounts}\text{receivable}\text{×}\text{Percentage}\text{of}\text{accounts}\text{receivables}\text{transferred}\right)\\ -\text{Assignment service charges expense}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\text{\$160,000×80\%}\right)\\ -\text{\$1,600}\text{(1)}\end{array}\right]\\ \text{=\$126,400}\end{array}$

(b) Specify the manner by which the given  agreement will be reported on Company W’s  December 31, 2016, balance  sheet by assuming that note is payable in short term.

Company W will report the transfer of accounts receivable under the head current asset with an amount of  $73,000 and will  report the  return liability as notes payable under the head current liabilities with an amount of $42,000.

2.

To determine

(a) Prepare journal entry to record the given transactions by assuming that Company W is using IFRS.

(b) Specify the manner by which the given  agreement will be reported on Company W’s  December 31, 2016, balance  sheet by assuming that note is payable in short term.

Explanation of Solution

(a) Prepare journal entry to record the given transactions by assuming that Company W is using IFRS.

Date	Account Title and Explanation	Debit	Credit
December 1,2016	Cash (4)	126,400
	Factory expense (3)	1,600
	Receivables from factor (5)	32,000
	Accounts receivable		160,000
	(To record the loss on sale of receivables without recourse liability)

Table (6)

• Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $126,400
• Factory expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the factory expense by $1,600.
• Receivables from factor are an asset and there is an increase in the value of asset. Hence, debit the receivables from factor by $32,000.
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivables by $160,000.

Date	Account Title and Explanation	Debit	Credit
December 11,2016	Return liability	1,000
	Receivables from factor		1,000
	( To record occurrence of sales returns and allowances on factored accounts)

Table (7)

• Return liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $1,000.
• Receivables from factor are an asset and there is a decrease in the value of asset. Hence, credit the receivables from factor by $1,000.

Date	Account Title and Explanation	Debit	Credit
December 31,2016	Cash	86,000
	Payable to factor		86,000
	( To record the amount payable to factor on  transfer of  accounts receivable)

Table (8)

• Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $86,000.
• Payable on factor is a liability and there is an increase in the value of liability. Hence, credit the payable to factor by $86,000.

Date	Account Title and Explanation	Debit	Credit
December 31,2016	Payable to factor	86,000
	Cash		86,000
	( To record the payment of interest on transfer of accounts receivable)

Table (9)

• Payable on factor is a liability and there is a decrease in the value of liability. Hence, debit the payable to factor by $86,000.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $86,000.

Working notes:

(3) Calculate the loss on sale of receivables:

$\begin{array}{c}\text{Loss}\text{on}\text{sale}\text{of}\text{receivables}\text{=}\left(\begin{array}{l}\text{Accounts}\text{receivables}\text{×}\text{Percentage}\text{commission}\text{on}\\ \text{the}\text{gross}\text{amount}\text{of}\text{receivables}\text{transferred}\end{array}\right)\\ \text{=\$160,000×1\%}\\ \text{=\$1,600}\end{array}$

(4) Calculate the amount of cash:

$\begin{array}{c}\text{Cash=}\left[\begin{array}{l}\left(\text{Accounts}\text{receivable}\text{×}\text{Percentage}\text{of}\text{accounts}\text{receivables}\text{transferred}\right)\\ -\text{Loss}\text{on}\text{sale}\text{of}\text{receivables}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\text{\$160,000×80\%}\right)\\ -\text{\$1,600}\text{(3)}\end{array}\right]\\ \text{=\$126,400}\end{array}$

(5) Calculate the receivables from factor:

$\begin{array}{c}\text{Receivables}\text{from}\text{factor}\text{=}\left[\text{Accounts}\text{receivable}\text{×}\left(\begin{array}{l}\text{100\%}-\text{Percentage}\text{of}\\ \text{accounts}\text{receivable}\text{transferred}\end{array}\right)\right]\\ \text{=\$160,000}\text{×}\left(\text{100\%}-8\text{0\%}\right)\\ \text{=\$160,000}\text{×}2\text{0\%}\\ \text{=\$32,000}\end{array}$

(b) Specify the manner by which the given  agreement will be reported on Company W’s  December 31, 2016, balance  sheet by assuming that note is payable in short term.

Company W will report the transfer of accounts receivable as receivables from factor under the head current asset with an amount of $31,000.