Question

Please help with problems 6, 7 , and 8

6. On July 22, Peter sold $23,500 of inventory items on credit with the terms 2/15, net 30. Payment on $15,000 sales was received on August 1 and the remaining payment was received on August 12. Assuming Peter uses the gross method of accounting for sales discounts, which one of the following entries was made on August 1 to record the cash received? a. Cash.................... 14,700 Sales Discount.................. 300 Accounts Receivable 15,000 b. Cash...... 15,000 Accounts Receivable... 15,000 C. Cash.. 14,700 Accounts Receivable........... 14,700 d. Accounts Receivable. 300 Sales Discount Forfeited..... 300 7. Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 6% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year? a $ 402,000. b. $ 390,000. c. $1,440,000 d. $ 378,000 8. Sun Inc. factors $6,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $230,000. What would be recorded as a gain (loss) on the transfer of receivables? a Loss of $300,000. b. Gain of $530,000. c. Loss of $1,130,000. d. Loss of $230,000.

Answer 1

Answer to Question 6: (a) Cash $14,700

Sales Discount $300

To Accounts Receivable $15,000

Concept:

There are 2 methods to accounting Sales discount: Gross method and Net method.

• Gross method assumes that the customer will not take advantage of the cash discount and
• hence does not account for it at the time of recording the sales.
• In case, customer does avail the discount by paying early, the same is recorded at the time of receipt of cash for the sales.

Therefore the entries will be:

At the time of credit sale with discount option

Accounts Receivable Dr 15,000

To Credit Sales 15,000

Scenario A- At the time cash receipt (If discount is availed)

Cash 14,700

Sales Discount 300

To Accounts Receivable 15,000

Scenario B- At the time cash receipt (If discount is NOT availed)

Cash 15,000

To Accounts Receivable 15,000

________________________________________________________________________________

Answer to Question 7	(d) $378,000
Solution:
Outstanding A/R	$ 6.5 million
Credit sales	$ 24 million
Allowance for doubtful debts	$12,000	Or $0.012 million
Uncollectible receivables or expected bad debts	=6% of $6.5 million
	$0.39 million
However, this will be first off against the credit balance in Allowance for doubtful debts of $0.012 million.
Therefore Bad debts recognized for the year=	$0.39-$0.012
	=$0.378 million
	or
	$378,000

Answer to Question 8: (a) Loss of $300,000

Factoring agreements can be of 2 types:

• With recourse- Where the seller of accounts receivable is liable to buy back in case the debts are uncollectible by the factor/finance company. There is a recourse liability for the seller of debts to pay in such a case.
• Without recourse- Where the seller of accounts receivable is NOT liable to buy back in case the debts are uncollectible by the factor/finance company. In this case, there is no recourse liability for the seller of debts to pay.

Journal entry in the case of factoring without recourse in the given question would be:

Cash Dr 5,400,000

Retention money due from factor Dr 600,000

Finance Charges/Loss on sale of receivables Dr 300,000

To Accounts Receivable 6,000,000

Therefore the loss on sale of receivables in factoring without recourse (at the time of factoring) would be to the extent of finance charges paid.