Evergreen Company sell lawn and gardenproducts to wholesalers. The company\'s fi

Question

Evergreen Company sell lawn and gardenproducts to wholesalers. The company's fiscal year-end is December31. During 2006, the following transactions related to receivablesoccurred:

Feb. 28 Sold merchandise to Lennox, Inc. for $10,000 andaccepted a 10%, 7 month note. 10% is an appropriate rate for thistype of note.

Mar. 31 Sold merchandise to Maddox Co. and accepted anoninterest-bearing note with a discount rate of 10%. The $8,000payment is due on March 31,2007.

Apr. 3 Sold merchandise to Carr Co. for $7,000 withterms 2/10, n/30. Evergreen uses the gross method to account forcash discounts.

Apr. 11 Collected the entire amount due from CarrCo.

Apr. 17 A customer returned merchandise costing $3,200.Evergreen reduced the customer's receivable balance by $5,000, thesales price of the merchandise. Sales returns are recorded by thecompany as they occur.

Apr. 30 Transferred receivables of $50,000 to a factorwithout recourse. The factor charged Evergreen a 1% finance chargeon 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 withoutrecourse.

Aug. 31 Lennox, Inc,. paid the note amount plus interestto the bank.

Required:

1. Prepare the necessary journal entries for Evergreen foreach of the above dates. For transactions involving the sale ofmerchandise, ignore the entry for the cost of goods sold (round allcalculations to the nearest dollar).

2. Prepare any necessary adjusting entries at December31,2006. Adjusting entries are only recorded at year-end (round allcalculations to the nearest dollar).

3. Prepare a schedule showing the effect of the journalentries in requirements 1 and 2 on 2006 income before taxes

Explanation / Answer

Notes Receivable $10,000

Sales Revenue $10,000

To record merchandise sold on account to Lennnox, Inc.

Notes Receivable $8,000

Sales Revenue $8,000

To record merchandise sold on account to Maddox Co

Notes Receivable $7,000

Sales Revenue $7,000

To record merchandise sold on account to Carr Co

           Cash     $6,860

04/17/11 04/30/11

Sales Discount $140

Notes Receivable        $7,000

To record collection from Carr Co.

Sales returns $5,000

Notes Receivable $5,000

To record returned merchandise

Cash $49,500

Finance Charge $500

Notes Receivables $50,000

To account for transferred receivables 06/30/11

Cash $10,010 Notes Receivable $10,000

Discount $10

To record Lennox receivable paid within discount period. 08/31/11

Cash $11,000

Interest $1,000

Notes Receivable $10,000

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