Question

4.

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 $12,000 and accepted a 10%, 7-month note. 10% is an appropriate rate for this type of note.
Mar.		31		Sold merchandise to Maddox Co. that had a fair value of $9,000, and accepted a noninterest-bearing note for which $10,000 payment is due on March 31, 2022.
Apr.		3		Sold merchandise to Carr Co. for $7,000 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 $5,200. Evergreen reduced the customer’s receivable balance by $7,000, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
		30		Transferred receivables of $70,000 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 12%. 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	Date	Accounts Title & Explanation	Debit	Credit
	Feb 28	Notes receivable	$12,000
		Sales Revenue		$12,000
	Mar 31	Notes receivable	$10,000
		Discount on note receivable		$1,000
		Sales Revenue		$9,000
	Apr 3	Accounts receivable	$7,000
		Sales Revenue		$7,000
	Apr 11	Cash	$6,790
		Sales Discounts	$210		($7,000 x 3%)
		Accounts Receivable		$7,000
	Apr 17	Sales Return	$7,000
		Accounts Receivable		$7,000
		Inventory	$5,200
		Cost of goods sold		$5,200
	Apr 30	Cash	$68,600
		Loss on sale of receivables	$1,400		($70,000 x 2%)
		Accounts Receivable		$70,000
	June 30	Interest Receivable	$400		($12,000 x 10% x 4/12)
		Interest Revenue		$400
	June 30	Cash	$12,319
		Loss on sale of note receivable	$81
		Interest receivable		$400
		Note receivable		$12,000
	Sep 30	No Entry
		No Entry
	Working
		Face amount	$12,000
		Interest to maturity	$700	($12,000 x 10% x 7/12)
		Maturity value	$12,700
		Discount	$381	($12,700 x 12% x 3/12)
		Cash proceeds	$12,319
2
	Adjusting Entry
	Dec 31	Discount on note receivable	$750		($1,000 x 9/12)
		Interest revenue		$750