Evergreen Company sells lawn and garden products to wholesalers. The company\'s

Question

Evergreen Company sells lawn and garden products to wholesalers. The company's fiscal year-end is December 31. During 2018, the following transactions related to receivables occurred Feb· 28 Sold merchandise to Lennox, Inc. for $18,000 and accepted a 8%, 7-month note. 8% is an appropriate rate Mar. 31 Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount rate of 8%. The Apr. 3 Sold merchandise to Carr Co. for $11,000 with terms 3/10, n/30. Evergreen uses the gross method to for this type of note $13,000 payment is due on March 31, 2019 account for cash discounts. 11 Collected the entire amount due from Carr Co. 17 A customer returned merchandise costing $4,900 Evergreen reduced the customer's receivable balance by $6,700, the sales price of the merchandise. Sales returns are recorded by the company as they occur. finance charge on the receivables transferred. The sale criteria are met. without recourse. 30 Transferred receivables of $67,000 to a factor without recourse. The factor charged Evergreen a 2% June 30 Discounted the Lennox, Inc., note at the bank. The bank's discount rate is 10%. The note was discounted 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, 2018. Adjusting entries are only recorded at year-end 3. Prepare a schedule showing the effect of the journal entries on 2018 income before taxes

Explanation / Answer

1)

june 30 **Value of note at maturity : 18000+ (18000*.08*7/12]

               = 18000+ 840

               = 18840

Discount period : 7 months -4 months expired (1 march -30 june) = 3

Discount on sale: 18840*.10*3/12 = 471

2)

3)

Date Account Debit credit Feb 28 Note receivable 18000 sales revenue 18000 [sales recorded against note] Mar 31 Note receivable 13000 Discount on note receivable [13000*.08] 1040 sales revenue 11960 [sales made against non interest bearing note] Apr 3 Accounts receivable 11000 sales revenue 11000 [sales made on account] Apr 11 Cash 10670 sales discount [11000*.03] 330 Accounts receivable 11000 [Amount due collected] Apr 17 sales return and allowance 6700 Accounts receivable 6700 [sales return recorded] Merchandise inventory 4900 cost of goods sold 4900 [cost of sales reversed on sales return ] Apr 30 cash 65660 Loss on sale of receivable [67000*.02] 1340 Accounts receivable 67000 [receivable sold/factored] June 30 Interest receivable 480 Interest revenue 480 [Interest earned on note issued by lennox inc for 4 months (1march-30 june) [18000*.08*4/12] june 30 cash 18009 Discount on sale of note ** 471 Interest receivable 480 Note receivable 18000 [Being note discounted with bank] sep3 0 No entry , since Note is discounted with bank .

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