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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Secured Borrowing: Assigning Accounts Receivable Furman Corporation entered into an assignment agreement with a finance company whereby Furman would be advanced 80% of all accounts assigned, minus a $2,000 service charge. The assignment does not meet the conditions for a sale and should be accounted for as a secured borrowing. During the year, $300,000 of accounts receivable were assigned, $220,000 collections were made on outstanding assigned accounts, and $210,000 was remitted to the finance company. This remittance included interest charges of $2,100. Sales returns and allowances on assigned accounts amounted to $5,000.

Required:

  1. 1. Prepare the journal entries necessary to record the preceding information.
  2. 2. Show how the preceding information would be reported on Furman’s year-end balance sheet (assume the note payable is short-term).

1.

To determine

Journalize the entries to record the previous information.

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.

Notes payable:

Notes payable is a written promise to make payment for specific sum at a certain future date that includes component of interest.

Prepare journal entries:

DateAccount Title and ExplanationDebitCredit
 Cash (1)$238,000 
 Assignment service charge expense$2,000 
      Notes payable $240,000
 (To record the receipt of cash)  

Table (1)

  • Cash is an asset and it is increased. Therefore, debit cash account by $238,000.
  • Assignment service charge expense is a component of stockholders’ equity and it is decreased. Therefore, debit assignment service charge expense by $2,000.
  • Notes payable is a liability and it is increased. Therefore, credit notes payable account by $240,000.
DateAccount Title and ExplanationDebitCredit
 Accounts receivable assigned$300,000 
      Accounts receivable $300,000
      ( To record the reclassification of receivables as assigned accounts receivable)  

Table (2)

  • Accounts receivables assigned is an asset and it is increased. Therefore, debit accounts receivables assigned account by $300,000.
  • Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivables account by$300,000.
DateAccount Title and ExplanationDebitCredit
 Cash$220,000 
           Accounts receivable assigned $220,000
      (To record cash collected on assigned accounts)  

Table (3)

  • Cash is an asset and it is increased. Therefore, debit cash account by $220,000.
  • Accounts receivables assigned is an asset and it is decreased. Therefore, credit accounts receivables assigned account by $220,000.
DateAccount Title and ExplanationDebitCredit
 Interest expense$2,100 
 Notes payable (Balancing figure)$207,900 
      Cash $210,000
 (To record the interest expense on remaining notes payable)  

Table (4)

  • Interest expense is a component of stockholders’ equity and it is decreased...

2.

To determine

State the manner in which the previous information will be reported in the year-end balance sheet of corporation F.

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