Question

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 $40,000 and accepted a 6%, 7-month note. 6% is an appropriate rate for this type of note.
Mar.		31		Sold merchandise to Maddox Co. that had a fair value of $28,200, and accepted a noninterest-bearing note for which $30,000 payment is due on March 31, 2022.
Apr.		3		Sold merchandise to Carr Co. for $15,000 with terms 2/10, 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 $4,400. Evergreen reduced the customer’s receivable balance by $6,200, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
		30		Transferred receivables of $62,000 to a factor without recourse. The factor charged Evergreen a 1% 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 8%. 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	$40,000
	Sales Revenue		$40,000
March 31	Note Recivable	$30,000
	Discount		$1,800
	Sales Revenue		$28,200
April 3	Accounts Receivable	$15,000
	Sales Revenue		$15,000
April 11	Cash (15,000×98%)	$14,700
	Sales Discounts (2%×$15,000)	$300
	Accounts Receivable		$15,000
Apri 17	Sales Return	$6,200
	Accounts Receivable		$6,200
April 17	Inventory	$4,400
	Cost of Goods Sold		$4,400
April 30	Cash (62,000×99%)	61,380
	Loss on Sale of Recivables ($62,000×1%)	$620
	Accounts Receivable		$62,000
June 30	Interest Receivable	$800
	Interest Revenue ($40,000 × 6% × 4/12)		$800
June 30	Cash	$40,572*
	Loss on Sale of More Receivable	$228
	Interest Receivabl		$800
	Note Receivable		$40,000
Sep.30	No Journal Entry is Required

Explanation for June 30;

Face Amount	$40,000
Interest on Maturity ($40,000× 6%×7/12)	$1,400
Maturity Value	$41,400
Discount (41,400 × 8% × 3/12)	(828)
Cash Proceeds	$40,572*

2.

No	Account Title and Explanation	Debit	Credit
1	Discount	$1,350
	Interest Revenue (1800×9/12)		$1,350

3.

Date	Income Increase (Decrease)
Feb.28	$40,000
March.31	$28,200
April 3	$15,000
April 11	$(300)
April 17	$(6,200)
April 17	$4,400
April 30	$(620)
June 30	$800
June 30	$(228)
Dec.31	$1,350
Total Effect	$82,402