Question

Accounts Receivable

Schultz Co. sells its goods and services to customers on a credit basis. Schultz adjusts its accounts just once a year, at the December 31 year-end. The company’s balance sheet at year-end 2018 reported the following information concerning the company’s accounts receivable:

Current assets:

Accounts receivable, net of allowance of $231,465                      $2,186,970

During 2019, Schultz experienced the following transactions related to its accounts receivable:

Sales on account	$11,179,280
Collections on account	10,614,915
Write-offs of accounts receivable	317,120
Collections of accounts previously written off	70,615

Schultz uses an aging of receivables to facilitate its accounting for doubtful accounts. The following information is available from the company’s aging schedule at year-end 2019:

Age Group	Amount	Estimated % Uncollectible
0-30 days	$1,282,370	1%
31-60 days	674,140	8%
61-90 days	341,920	18%
91-120 days	203,580	29%
Over 120 days	163,670	63%
	$2,665,680

4-Year Promissory Note

On December 31, 2019, Schultz received a 4-year promissory note as consideration in an inventory sale transaction on that date. The 5%, $63,480 note requires the customer to pay interest annually on December 31 (2020 through 2023). The going market rate of interest for comparable notes on the issue date was 8%.

5-Year Promissory Note

On that same date (December 31, 2019), Schultz received a 5-year promissory note from another customer as consideration in an inventory sale transaction. The note is noninterest-bearing, and it calls for the customer to pay the full face value of $38,125 on the December 31, 2024 maturity date. The going market rate of interest for comparable notes on the issue date was 9%.

Schultz uses the effective-interest method to amortize premiums and discounts on all of its promissory notes.

– Instructions –

Address the following matters related to Schultz Co.’s accounts and notes receivable transactions:

1. Give the journal entries to record the transactions in 2019 related to Schultz’s accounts receivable. (Hint – A total of 5 entries are needed.)

2. Prepare the adjusting entry needed for bad debts at year-end 2019 based on the aging schedule information provided.

3. Give the entry to record Schultz’s receipt of the 4-year promissory note on December 31, 2019.

4. Give the interest and collection entries Schultz must make over the remaining term of the 4-year note (through December 31, 2023). Tip – You might find it helpful to start by preparing an amortization schedule (see pages 340 and 341).

5. Give the entry to record Schultz’s receipt of the 5-year promissory note on December 31, 2019.

6. Give the interest and collection entries Schultz must make over the remaining term of the 5-year note (through December 31, 2024). Tip – You might find it helpful to start by preparing an amortization schedule (see pages 340 and 341).

Answer 1

a. In the books of Shultz Co.

Transaction / Event	Account Titles	Debit	Credit
		$	$
1.	Accounts Receivable	11,179,280
	Sales		11,179,280
	To record sales on account
2.	Cash	10,614,915
	Accounts Receivable		10,614,915
	To record collections on account
3.	Allowance for Doubtful Accounts	317,120
	Accounts Receivable		317,120
	To write off uncollectible accounts
4.	Accounts Receivable	70,615
	Allowance for Doubtful Accounts		70,615
	To reinstate accounts receivable previously written off
5.	Cash	70,615
	Accounts Receivable		70,615
	To record collection of accounts previously written off.

b.

Age	Amount	Estimated % Uncollectible	Estimated Amount Uncollectible
0-30 days	$ 1,282,370	1 %	$ 12,823.70
31-60 days	674,140	8 %	53,931.20
61-90 days	341,920	18 %	61,545.60
91-120 days	203,580	29 %	59,038.20
Over 120 days	163,670	63 %	103,112.10
	$ 2,665,680		$ 290,450.80

Adjusting entry:

Date	Account Titles	Debit	Credit
		$	$
December 31, 2019	Bad Debt Expense	305,490.80
	Allowance for Doubtful Accounts		305,490.80

Allowance for Doubtful Accounts :

Accounts Receivable	317,120	Beginning balance	231,465
		Accounts Receivable	70,615
		Bad Debt Expense ( Plug Variable )	305,490.80
		Ending balance	290,450.80

c. Present value of the note = $ 63,480 x 5 % x [ { 1 - ( 1 / 1.08 ) ⁴ } / 0.08 ] + $ 63,480 x ( 1 / 1.08 ) ⁴ = 3,174 x 3.3121 + $ 63,480 x 0.7350 = $ 10,512.61 + $ 46,657.80 = $ 57,170.41

Date	Account Titles	Debit	Credit
		$	$
December 31, 2019	Note Receivable	63,480
	Discount on Note Receivable		6,310
	Sales Revenue		57,170
	To record issuance of 4 year promissory note

d. Amortization Table:

Date	Amount Received	Interest Revenue	Amortization of Discount	Note Carrying Value
December 31, 2019				57,170
December 31, 2020	3,174	4,574	1,400	58,570
December 31, 2021	3,174	4,686	1,512	60,082
December 31, 2022	3,174	4,807	1,633	61,715
December 31, 2023	3,174	4,939	1,765	63,480

d.

Date	Account Titles	Debit	Credit
		$	$
December 31, 2020	Cash	3,174
	Discount on Note Receivable	1,400
	Interest Revenue		4,574
December 31, 2021	Cash	3,174
	Discount on Note Receivable	1,512
	Interest Revenue		4,686
December 31, 2022	Cash	3,174
	Discount on Note Receivable	1,633
	Interest Revenue		4,807
December 31, 2023	Cash	66,654
	Discount on Note Receivable	1,765
	Interest Revenue		4,939
	Note Receivable		63,480