You are auditing the balance sheet section of a client\'s balance sheet as of 12

Question

You are auditing the balance sheet section of a client's balance sheet as of 12/31/2011. You see that there is a $1,000,000 long-term debt outstanding to Sturdy Savings Bank which is due on 12/15/2016. You read the loan agreement and see that there is an acceleration clause (research this term). The clause reads that the borrower cannot borrow more than $10,000 from any other entity during the term of the $1,000,000 without prior approval of Sturdy Savings Bank. If your client violates this clause, the $1,000,000 becomes due and payable upon demand of the lender. Assume that you client had violated the acceleration clause on 11/1/2011. Discuss how you would handle this situation and how it might affect your client's financial statements for the year ended 12/31/11. (You can get a clue in the middle of page 444 of your textbook).

Explanation / Answer

On January 10, 2012, Ruggiero Co. sold merchandise on account to Edwards for $8,000, terms n/30. On February 9, Edwards gave Ruggiero Co. a 7% promissory note in settlement of this account. Prepare the journal entry to record the sale and the settlement of the accounts receivable. (Omit cost of goods sold entries.)

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