Question

8.

Evergreen Company sells lawn and garden products to wholesalers. The company's fiscal year-end is December 31. During 2021, the following transactions related to receivables occurred:

Feb.		28		Sold merchandise to Lennox, Inc., for $18,000 and accepted a 8%, 7-month note. 8% is an appropriate rate for this type of note.
Mar.		31		Sold merchandise to Maddox Co. that had a fair value of $11,960, and accepted a noninterest-bearing note for which $13,000 payment is due on March 31, 2022.
Apr.		3		Sold merchandise to Carr Co. for $11,000 with terms 3/10, n/30. Evergreen uses the gross method to account for cash discounts.
		11		Collected the entire amount due from Carr Co.
		17		A customer returned merchandise costing $4,900. Evergreen reduced the customer’s receivable balance by $6,700, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
		30		Transferred receivables of $67,000 to a factor without recourse. The factor charged Evergreen a 2% finance charge on the receivables transferred. The sale criteria are met.
June		30		Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 10%. The note was discounted without recourse.
Sep.		30		Lennox, Inc., paid the note amount plus interest to the bank.

Required:
1. Prepare the necessary journal entries for Evergreen for each of the above dates. For transactions involving the sale of merchandise, ignore the entry for the cost of goods sold.
2. Prepare any necessary adjusting entries at December 31, 2021. Adjusting entries are only recorded at year-end.
3. Prepare a schedule showing the effect of the journal entries on 2021 income before taxes.

Answer 1

1. General Journal

Date	Account Title and Explanation	Debit	Credit
Feb.28	Note Receivable	$18,000
	Sales Revenue		$18,000
March.31	Note Receivable	$13,000
	Discount		$1,040
	Sales Revenue		$11,960
April.3	Accounts Receivable	$11,000
	Sales Revenue		$11,000
April.11	Cash($11,000×97%)	$10,670
	Sales Discount ($11,000×3%)	$330
	Accounts Receivable		$11,000
April.17	Sales Return	$6,700
	Accounts Receivable		$6,700
April.17	Inventory	$4,900
	Cost of Goods Sold		$4,900
April.30	Cash ($67,000×98%)	$65,660
	Loss on Sale of Receivables ($67,000×2%)	$1,340
	Accounts Receivable		$67,000
June .30	Interest Receivable	$480
	Interest Revenue($18,000×8%×4/12)		$480
June.30	Cash	$18,369*
	Loss on Sale of Note Receivable	$111
	Note Receivable		$18,000
	Interest Receivable		$480
Sep.30	No Journal Entry is Required

*

Face Amount	$18,000
Interest on maturity (18,000×8%×7/12)	$840
Maturity Value	$18,840
Discount ($18,840×10%×3/12)	$471
Cash Proceeds	$18,369

2.

Date	Account Title and Explanation	Debit	Credit
1	Discount	$780
	Interest Revenue ($1,040×9/12)		$780

3.

Date	Income Increase (Decrease)
Feb.28	$18,000
March.31	$11,960
April.3	$11,000
April.11	$(330)
April.17	$(6,700)
April.17	$4,900
April.30	$(1,340)
June 30	$480
June 30	$(111)
Dec.31	$780
Total Effect	$38,639