Evergreen Company sells lawn and garden products to wholesalers. The company\'s
ID: 2562544 • Letter: E
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:
Sold merchandise to Lennox, Inc. for $24,000 and accepted a 8%, 7-month note. 8% is an appropriate rate for this type of note.
Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount rate of 8%. The $22,000 payment is due on March 31, 2019.
Sold merchandise to Carr Co. for $20,000 with terms 2/10, n/30. Evergreen uses the gross method to account for cash discounts.
Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 10%. The note was discounted without recourse.
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.
Sold merchandise to Lennox, Inc. for $24,000 and accepted a 8%, 7-month note. 8% is an appropriate rate for this type of note.
Mar. 31Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount rate of 8%. The $22,000 payment is due on March 31, 2019.
Apr. 3Sold merchandise to Carr Co. for $20,000 with terms 2/10, 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 $4,500. Evergreen reduced the customer’s receivable balance by $6,300, the sales price of the merchandise. Sales returns are recorded by the company as they occur. 30 Transferred receivables of $63,000 to a factor without recourse. The factor charged Evergreen a 1% finance charge on the receivables transferred. The sale criteria are met. June 30Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 10%. The note was discounted without recourse.
Sep. 30 Lennox, Inc., paid the note amount plus interest to the bank.Explanation / Answer
Answer:
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.
Date
Description
Debit $
Credit $
28-Feb
Note receivable
24000
Sales revenue
24000
(to record the note for sale)
31-Mar
Note receivable (face amount)
22,000
Discount ($22,000 x 8%)
1760
Sales revenue (difference)
20,240
3-Apr
Accounts receivable
20,000
Sales revenue
20,000
11-Apr
Cash (98% x $20,000)
19600
Sales discounts (2% x $20,000)
400
Accounts receivable
20,000
17-Apr
Sales returns
6300
Accounts receivable
6300
Inventory
4500
Cost of goods sold
4500
30-Apr
Cash (99% x $63,000)
62370
Loss on sale of receivables
(1% x $63,000)
630
Accounts receivable
63,000
30-Jun
Interest receivable
640
Interest revenue ($24,000 x 8% x 4/12)
640
30-Sep
Cash (proceeds determined below)
$24,366
Loss on sale of note receivable (to balance)
$273.60
Interest receivable (from adjusting entry)
640
Note receivable (face amount)
24,000
$24,000
Face amount
1120
Interest to maturity ($24,000 x 8% x 7/12)
$25,120
Maturity value
-753.6
Discount ($25120x 12% x 3/12)
$24,366
Cash proceeds
___________________________________________________________________
2. Prepare any necessary adjusting entries at December 31, 2018. Adjusting entries are only recorded at year-end.
Date
Description
Debit $
Credit $
31-Dec
Discount
1320
Interest revenue ($22,000 x 8% x 9/12)
1320
__________________________________________________________________________
3. Prepare a schedule showing the effect of the journal entries on 2018 income before taxes.
Income
Date
increase (decrease)
28-Feb
$24,000
31-Mar
20,240
3-Apr
20,000
11-Apr
-400
17-Apr
-6,300
17-Apr
4,500
30-Apr
-630
30-Jun
640
30-Jun
($273.60)
31-Dec
1320
Total effect
$63,096
Date
Description
Debit $
Credit $
28-Feb
Note receivable
24000
Sales revenue
24000
(to record the note for sale)
31-Mar
Note receivable (face amount)
22,000
Discount ($22,000 x 8%)
1760
Sales revenue (difference)
20,240
3-Apr
Accounts receivable
20,000
Sales revenue
20,000
11-Apr
Cash (98% x $20,000)
19600
Sales discounts (2% x $20,000)
400
Accounts receivable
20,000
17-Apr
Sales returns
6300
Accounts receivable
6300
Inventory
4500
Cost of goods sold
4500
30-Apr
Cash (99% x $63,000)
62370
Loss on sale of receivables
(1% x $63,000)
630
Accounts receivable
63,000
30-Jun
Interest receivable
640
Interest revenue ($24,000 x 8% x 4/12)
640
30-Sep
Cash (proceeds determined below)
$24,366
Loss on sale of note receivable (to balance)
$273.60
Interest receivable (from adjusting entry)
640
Note receivable (face amount)
24,000
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