Question

Toronto Corporation records its sales at their gross amount. On December 31, 2015, Toronto Corporation’s balance sheet included the following:

Trade accounts receivable                                $630,000

Allowance for doubtful accounts                       (49,500)

Accounts receivable, net                         $580,500

During 2016, the following transactions occurred:

1. New sales on account                                                                         $967,000
2. Collections on past credit sales                                                      913,000
3. Accounts receivable written off as uncollectible                                31,400
4. Collection of accounts previously written off as uncollectible                 1,200
5. At year-end, the company estimated that a balance of $45,700

is needed in its allowance for doubtful accounts

Required:

1. Prepare journal entries to record each of the above transactions

2. Compute the net realizable value of accounts receivable that should appear on Toronto’s December 31, 2016 balance sheet

Part B

Maxwell Corporation factored, with recourse, $300,000 of accounts receivable with Huskie Financing. The finance charge is 4%, and 6% was retained to cover sales discounts, sales returns, and sales allowances. Maxwell estimates the recourse obligation at $5,800.

Required:

Prepare Maxwell’s journal entry to record this factoring of its accounts receivable.

Part C

On December 31, 2016, Geosue Company finished consultation services for Nolan Corporation and accepted in exchange a promissory note with a face value of $900,000, a due date of December 31, 2019, and a stated rate of 7%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. However, a similar note is considered to have a market rate of interest of 9%.

Required:

1. Determine the present value of the note.

2. Prepare an effective interest amortization schedule for Geosue relative to this note. (Round to whole dollars.)

Part D

Nicholas Company loaned $68,587 to Nathan, Inc. in exchange for Nathan’s 2-year, $80,000, zero-interest-bearing note. Nathan’s incremental borrowing rate for comparable debt is 8%.

Required:

1. Prepare an effective interest amortization schedule for Nicholas relative to this note. (Round to whole dollars.)

2. Prepare Nicholas’ journal entries for the initial loan transaction, recognition of interest each year, and the collection of the note at maturity.

Answer 1

Requirement 1: Prepare the journal entries as follows.

Item	Account Title and Explanation	Debit	Credit
a	Accounts receivable	$967,000
	Sales revenue		$967,000
	To record sales revenue on account
b	Cash	$913,000
	Accounts receivable		$913,000
	To record cash collected on account
c	Allowance for uncollectible accounts	$31,400
	Accounts receivable		$31,400
	To record accounts receivable written off
d	Accounts receivable	$1,200
	Allowance for uncollectible accounts		$1,200
	To restore accounts receivable written off
	Cash	$1,200
	Accounts receivable		$1,200
	To record cash collected on account
e	Bad debt expense	$26,400
	Allowance for uncollectible accounts		$26,400
	To record bad debt expense

Requirement 2: Value of accounts receivable

Accounts receivable	$652,600
Less: Allowance for doubtful accounts	$45,700
Accounts receivables, Net	$606,900

Notes:

Allowance for Doubtful Accounts
c.	$31,400	$49,500	Beg. Bal
		$1,200	d.
		$26,400	e.
		$45,700	End. Bal
Accounts Receivable
Beg. Bal	$630,000	$913,000	b.
a.	$967,000	$31,400	c.
d.	$1,200	$1,200	d.
End. Bal	$652,600