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 $30,000 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 $20,240, and accepted a noninterest-bearing note for which $22,000 payment is due on March 31, 2022.
Apr.		3		Sold merchandise to Carr Co. for $20,000 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 $4,300. Evergreen reduced the customer’s receivable balance by $6,100, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
		30		Transferred receivables of $61,000 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 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.

a.Sold merchandise to Lennox, Inc. for $30,000 and accepted a 8%, 7-month note. 8% is an appropriate rate for this type of note.

b.  Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount rate of 8%. The $22,000 payment is due on March 31, 2021.

c. Sold merchandise to Carr Co. for $20,000 with terms 2/10, n/30. Evergreen uses the gross method to account for cash discounts.

d Collected the entire amount due from Carr Co.

e Evergreen reduced the customer’s receivable balance by $6,100, the sales price of the merchandise. Sales returns are recorded by the company as they occur.

f A customer returned merchandise costing $4,300.

g Transferred receivables of $61,000 to a factor without recourse. The factor charged Evergreen a 1% finance charge on the receivables transferred. The sale criteria are met.

h Record the accrual of four months of interest on the note receivable issued on February 28.

i Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 10%. The note was discounted without recourse.

j Lennox, Inc., paid the note amount plus interest to the bank.

2. Prepare any necessary adjusting entries at December 31, 2021. Adjusting entries are only recorded at year-end.

Record accrued interest at December 31, 2021.
3. Prepare a schedule showing the effect of the journal entries on 2021 income before taxes

	Income Date increase (decrease) February 28 March 31 April 3 April 11 April 17 April 17 April 30 June 30 June 30 December 31 Total effect

Answer 1

Part 1

Date	Account titles and explanation	Debit	Credit
Feb. 28, 2021	Note receivable	30000
	Sales revenue		30000
March 31, 2021	Note receivable	22000
	Discount		1760
	Sales revenue (difference)		20240
April 3, 2021	Accounts receivable	20000
	Sales revenue		20000
April 11, 2021	Cash	19600
	Sales discounts	400
	Accounts receivable		20000
April 17, 2021	Sales returns	6100
	Accounts receivable		6100
	Inventory	4300
	Cost of goods sold		4300
April 30, 2021	Cash	60390
	Loss on sale of receivables (61000*1%)	610
	Accounts receivable		61000
June 30, 2021	Interest receivable	800
	Interest revenue (30000*8%*4/12)		800
June 30, 2021	Cash	30615
	Loss on sale of note receivable (difference)	185
	Interest receivable		800
	Note receivable		30000

Maturity value = 30000+(30000*8%*7/12) = 31400

Discount = (31400*10%*3/12) = 785

Cash proceeds = 31400-785 = 30615

Part 2

Date	Account titles and explanation	Debit	Credit
Dec. 31, 2021	Discount (30000*8%*6/12)	1200
	Interest revenue		1200

Part 3

Date	Income increase (Decrease)
February 28	30000
March 31	20240
April 3	20000
April 11	(400)
April 17	(6100)
April 17	4300
April 30	(610)
June 30	800
June 30	(185)
December 31	1200
Total effect	$69245