Question

Singer Corporation was involved in the following events in the current year:

June 30	Barney Manufacturing gives Singer a $3,000, 11%, 90-day note for merchandise purchased.
July 15	Dillon Construction Co. gives Singer a $6,000, 10%, 60-day note for merchandise originally purchased, on account, on April 20 of the current year.
30	The Barney and Dillon notes are sold with recourse by Singer at its bank at 12%. The estimated fair value of the recourse liability is $1,200.
Sept 15	The bank notifies Singer that the Dillon note was paid.
30	The bank notifies Singer that Barney defaulted on the note and charges the amount of principal, interest, and a fee of $20 against Singer’s bank account.

Prepare the journal entries to record the preceding information on Singer’s accounting records. Assume that the company does not normally sell its notes.

Answer 1

Answer:

Date	Account Title and Explanation	Debit	Credit
Jun-30	Notes Receivables	3000
	Sales Revenue		3000
	(To record credit sales to Barney Manufacturing)
Jul-15	Notes Receivables	6000
	Accounts Receivables		6000
	(To record note received on accounts of receivables)
Jul-30	Cash (Note -1)	9029.35
	Loss from Sale of Receivables (Note-2)	1223.15
	Notes Receivables		9000
	Interest Income (Note- 2))		52.5
	Recourse Liability		1200
	(To record sale of notes receivables)
Sep-15	No Entry Required
Sep-30	Recourse Liability	1200
	Notes Receivable Dishonoured	1902.5
	Cash (Maturity Value ($3082.5) + Fees ($20)		3102.5
	(To record default by Barney Manufacturing on its note)

Note-1: Calculation of Proceed from Sale of Notes Receivable;

	Barney Manufacturing	Dillon Construction
Face Value of Note	3000	6000
Interest to Maturity
=$3000 * 11% * 90/360	82.5
=$6000 * 10% * 60/360		100
Maturity Value of Note	3082.5	6100
Less: Discount by Bank
= $3082.5 * 12% * 60/360 (Aug 1 to Sept 30)	-61.65
= $6100 * 12% * 45/360 (Aug 1 - Sept 15)		-91.5
Proceed Received from Bank	3020.85	6008.5

Note-2: Calculation of Loss or Gain on Sale of Notes Receivables;

Procced from Selling Notes Receivables (3020.85 + 6008.5)	9029.35
Less:
Face Value of Note	-9000
Accrued Interest Income
- $3000 * 11% * 30/360 (June 30 to July 30)	-27.5
- $6000 * 10% * 15/360 (July 15 to July 30)	-25
Recourse Liability	-1200
Loss from Sale of Receivables	-1223.15