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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Transferring Accounts Receivable White Corporation has entered into an agreement to transfer accounts receivable to Murphy Company. Under the terms of this agreement. White receives 80% of the value of all the transferred accounts receivable (to reflect credit risk) and is charged a 1% service charge, which is based upon the dollar amount of transferred receivables. Interest is charged at an annual interest rate of 12% of any outstanding loan balance. The transferred receivables will continue to be collected by White with any cash flows being remitted to Murphy at the end of each month. White is not allowed to transfer the receivables to anyone else. White normally transfers its accounts receivable. The following selected 2019 transactions relate to this agreement:

Chapter 6, Problem 14E, Transferring Accounts Receivable White Corporation has entered into an agreement to transfer

Required:

  1. 1. Assume that White uses U.S. GAAP.
    1. a. Prepare journal entries on White’s books to record the preceding transactions.
    2. b. How would this agreement be reported on White’s December 31, 2019, balance sheet (assume the note payable is short term)?
  2. 2. Assume that White uses IFRS:
    1. a. Prepare journal entries on White’s books to record the preceding transactions.
    2. b. How would this agreement be reported on White’s December 31, 2019, balance sheet (assume the note payable is short-term)?

1.

To determine

(a) Prepare journal entry to record the given transactions by assuming that Company W is using U.S GAAP.

(b) Specify the manner by which the given  agreement will be reported on Company W’s  December 31, 2019, balance  sheet by assuming that note is payable in short term.

Explanation

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

(a) Prepare journal entry to record the given transactions by assuming that Person W is using U.S GAAP.

DateAccount Titles and explanationDebit ($)Credit ($)
December 1,2019Cash  (2)126,400 
 Assignment service charge expense  (1)1,600 
      Notes payable ($160,000×80%) 128,000
 (To record transfer  of accounts receivable)  

Table (1)

  • Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $126,400.
  • Assignment service charge expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the assignment service charge expense by $1,600.
  • Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $128,000.
DateAccount Titles and explanationDebit ($)Credit ($)
December 1,2019Accounts receivable assigned160,000 
      Accounts receivable 160,000
 (To record the  transfer of accounts receivable to accounts receivable assigned account)  

Table (2)

  • Accounts receivable assigned is an asset and there is an increase in the value of an asset. Hence, debit account receivable assigned account by $160,000.
  • Accounts receivable is an asset and there is a decrease in the value of an asset. Hence, credit the account receivable account by $160,000.
DateAccount Titles and explanationDebit ($)Credit ($)
December 11,2019Return liability1,000 
      Accounts receivable assigned 1,000
 (To record the sales returns on credit  merchandise)  

Table (3)

  • Return liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $1,000.
  • Accounts receivable assigned is an asset and there is a decrease in the value of asset. Hence, credit the asset by $1,000.
DateAccount Titles and explanationDebit ($)Credit ($)
December 31,2019Cash86,000 
      Accounts receivable assigned 86,000
 (To record the cash collected on transfer of  accounts receivable)  

Table (4)

  • Cash is an asset and there is an increase in the value of asset

2.

To determine

(a) Prepare journal entry to record the given transactions by assuming that Company W is using IFRS.

(b) Specify the manner by which the given  agreement will be reported on Company W’s  December 31, 2019, balance  sheet by assuming that note is payable in short term.

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