Chapter 7, Problem 7.24E

(1)

To determine

Receivables:

Receivables refer to an amount to be received in future. General classifications of receivables are accounts receivable, note receivable, and other receivables.

To prepare: Journal entries for each transaction.

Explanation of Solution

March 17: Write-off of account receivables:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
March 17, 2016	Allowance for uncollectible accounts		1,700
	Accounts Receivable			1,700
	(To record the write-off of receivables)

Table (1)

March 30: Receipt of Notes Receivable:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
March 30, 2016	Notes Receivable		20,000
	Cash			20,000
	(To record receipt of notes receivable)

Table (2)

May 30: Discounting of Notes Receivable:

• Accrual of Interest:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
May 30, 2016	Interest Receivable		233
	Interest revenue (1)			233
	(To record accrued interest)

Table (3)

• To record the loss:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
May 30, 2016	Cash  (5)		19,973
	Loss on Sale of Note Receivable (Refer table 5)		260
	Notes Receivable			20,000
	Interest Receivable (1)			233
	(To record the discounting of note receivable)

Table (4)

Working note:

Compute the amount of interest accrued:

Principal = $20,000

Rate of interest = 7%

Period = 2 Months (March 30 to May 30)

$\begin{array}{c}\text{Interest}=\text{Principal}\times \text{Rate of interest}\times \text{Interest period}\\ =\text{\$20,000}\times \frac{7}{100}\times \frac{2}{12}\\ =\$233\end{array}$                            (1)

Compute the amount of interest on maturity:

Principal = $20,000

Rate of interest = 7%

Period = 12 Months (March 30, 2016 to March 30, 2015)

$\begin{array}{c}\text{Interest}=\text{Principal}\times \text{Rate of interest}\times \text{Interest period}\\ =\text{\$20,000}\times \frac{7}{100}\\ =\$1,400\end{array}$                           (2)

Compute the maturity value:

$\begin{array}{c}\text{Maturity Value}=\text{Face value}+\text{Interest}\\ =\text{\$20,000}+\text{\$1,400 (2)}\\ =\text{\$21,400}\end{array}$                                                (3)

Compute the amount discount on discounting the note:

$\begin{array}{c}\text{Discount}=\left(\begin{array}{l}\text{Maturity Value}\times \text{Rate of interest}\\ \times \text{Remaining period}\end{array}\right)\\ =\text{\$20,000}\times \frac{8}{100}\times \frac{10\left(12-2\right)}{12}\\ =\$1,427\end{array}$                                      (4)

Compute the amount of cash proceeds:

$\begin{array}{c}\text{Cash Proceeds}=\text{Maturity Value}-\text{Discount}\\ =\text{\$21,400 (3)}-\$1,427(4)\\ =\$19,973\end{array}$                                        (5)

Compute the loss on sale of notes receivable:

Face value of Notes Receivable	$20,000
Add: Interest Receivable	233
Less: Cash Proceeds	(19,973)
Loss on Sale of Investments	$260

Table (4)

June 30:  Sales:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 30, 2016	Accounts Receivable		12,000
	Sales Revenue			12,000
	(To record the sales on account)

Table (5)

July 8: Collection from Customers:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 8, 2016	Cash (7)		11,760
	Sales Discount (6)		240
	Accounts Receivable			12,000
	(To record the sales remittance)

Table (6)

Working note:

Compute the amount of discount:

The sale was made on June 30 and the payment is received on July 8.  Hence, the customer is eligible for a sales discount of 2% (2/10 term).

$\begin{array}{c}\text{Sales Discount}=\text{Amount}\text{Due}\times \text{Rate of Discount}\\ =\text{\$12,000}\times \text{2\% }\\ =\$240\end{array}$ (6)

Compute the amount of cash received from the customer:

$\begin{array}{c}\text{Cash Received}=\left(\text{Invoice Price}-\text{Sales Discount}\right)\\ =\left(\text{\$12,000}-\$240\right)\\ =\$11,760\end{array}$ (7)

August 31: Sale of Stock:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 31, 2016	Notes Receivable		6,000
	Discount on Note Receivable (8)			240
	Investments			5,000
	Gain on Sale of Investments			760
	(To record the exchange of notes receivable with stock)

Table (7)

Working note:

Compute the discount on notes receivable:

$\begin{array}{c}\text{Discount}=\text{Principal}\times \text{Rate of interest}\times \text{Interest period}\\ =\text{\$6,000}\times \frac{8}{100}\times \frac{6\left(\text{February 28 to August 31}\right)}{12}\\ =\$240\end{array}$ (8)

Compute the gain on sale of investments:

Face value of Notes Receivable	$6,000
Less: Book value of investment	(5,000)
Less: Discount on Note receivable	(240)
Loss on Sale of Investments	$760

Table (8)

December 31, 2016: Bad Debts Expense:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2016	Bad Debts Expense (9)		14,000
	Allowance for uncollectible accounts			14,000
	(To record the depreciation expense)

Table (9)

Working note:

Compute the amount of bad debts expense:

$\begin{array}{c}\text{Bad Debts Expense}=\text{2\% of Credit Sales}\\ =\text{\$700,000}\times \text{2\%}\\ =\text{\$14,000}\end{array}$ (9)

To determine

To prepare: necessary adjusting entry.

Explanation of Solution

December 31, 2016: Adjusting Entry for Interest Accrual:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Discount on Note Receivable		160
	Interest revenue (10)			160
	(To record accrued interest)

Table (10)

Working note:

Compute the amount of interest:

Principal = $6,000

Rate of interest = 8%

Period = 4 Months (August 31 to December 31)

$\begin{array}{c}\text{Interest}=\text{Principal}\times \text{Rate of interest}\times \text{Interest period}\\ =\text{\$6,000}\times \frac{8}{100}\times \frac{4}{12}\\ =\$160\end{array}$ (10)