Chapter 7, Problem 7.10P

(1)

To determine

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.

To prepare: The journal entry to record the sales and collection.

Explanation of Solution

• For Sales on February 28, 2016:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
February 28, 2016	Notes Receivable		10,000
	Sales Revenue			10,000
	(To record the sales on account)

Table (1)

• For Sales and receipt of noninterest bearing note on March 31, 2016:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31, 2016	Notes Receivable		8,000
	Sales Revenue  (2)			7,200
	Discount  (1)			800
	(To record the sales on account)

Table (2)

Working Note:

Compute the amount of discount:

$\begin{array}{c}\text{Discount = Amount}\text{Due}\times \text{Rate of Discount}\\ \text{=}\text{\$8,000}\times 10\text{\% }\\ \text{=}\$800\end{array}$ (1)

Compute the amount of Sales revenue:

$\begin{array}{c}\text{Sales Revenue = }\left(\text{Notes Receivable }-\text{Discount}\right)\\ \text{=}\left(\text{\$8,000}-\$800\right)\\ =\$7,200\end{array}$ (2)

• For Sales on April 3, 2016:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 3, 2016	Accounts Receivable		7,000
	Sales Revenue			7,000
	(To record the sales on account)

Table (3)

• For Cash collection from sales above on April 11:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 11, 2016	Cash (4)		6,860
	Sales Discount (3)		140
	Accounts Receivable			7,000
	(To record the sales remittance)

Table (4)

Working Note:

Compute the amount of discount:

The sale was made on April 3 and the payment is received on April 11. Hence, the customer is eligible for a sales discount of 2% (2/10 term).

$\begin{array}{c}\text{Sales Discount = Amount}\text{Due}\times \text{Rate of Discount}\\ \text{=}\text{\$7,000}\times \text{2\% }\\ \text{=}\$140\end{array}$ (3)

Compute the amount of cash received from the customer:

$\begin{array}{c}\text{Cash Received = }\left(\text{Invoice Price }-\text{Sales Discount}\right)\\ \text{=}\left(\text{\$7,000}-\$140\right)\\ =\$6,860\end{array}$ (4)

• For Sales Returns  on April – 17:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 17, 2016	Sales Returns		5,000
	Accounts Receivable			5,000
	(To record the Sales Return at invoice price)

Table (5)

• For Cost of Goods Sold – Sales Returns:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Merchandised Inventory		3,200
	Cost of Goods Sold			3,200
	(To record the cost of goods sold)

Table (6)

• April 30, 2016 – Discounting of Notes Receivable:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 30, 2016	Cash (6)		49,500
	Loss on Sale of Note Receivable (5)		500
	Notes Receivable			50,000
	(To record the discounting of note receivable)

Table (7)

• June 30 - Accrual of Interest:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
June 30, 2016	Interest Receivable		333
	Interest revenue (7)			333
	(To record accrued interest)

Table (8)

Working note:

Compute the amount of loss on sale of accounts receivable:

$\begin{array}{c}\text{Loss on Sale of Accounts Receiavble = }\left[\begin{array}{l}\text{Notes Receivable}\\ \times \text{Rate of Finance Charge}\end{array}\right]\\ \text{=}\text{\$50,000}\times 1\text{\% }\\ \text{=}\$500\end{array}$ (5)

Compute the amount of cash to be received from sale of accounts receivable:

$\begin{array}{c}\text{Cash Received = }\left(\text{Notes Receivable }-\text{Finance Charges}\right)\\ \text{=}\left(\text{\$50,000}-\$500\right)\\ =\$49,500\end{array}$ (6)

Compute the amount of interest accrued:

Principal = $10,000

Rate of interest = 10%

Period = 4 Months (February 28 to June 30)

$\begin{array}{c}\text{Interest = Principal }\times \text{ Rate of interest }\times \text{ Interest period}\\ \text{ = \$10,000}\times \frac{10}{100}\times \frac{4}{12}\\ =\$333\end{array}$ (7)

• For Discounting of Notes Receivable  on June 30:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 30, 2016	Cash (11)		10,266
	Loss on Sale of Note Receivable (Table 12)		67
	Notes Receivable			10,000
	Interest Receivable			333
	(To record the discounting of note receivable)

Table (9)

Working note:

Compute the amount of interest on maturity:

Principal = $10,000

Rate of interest = 10%

Period = 7 Months

$\begin{array}{c}\text{Interest = Principal }\times \text{ Rate of interest }\times \text{ Interest period}\\ \text{ = \$10,000}\times \frac{10}{100}\times \frac{7}{12}\\ =\$583\end{array}$ (8)

Compute the maturity value:

$\begin{array}{c}\text{Maturity Value = Face value + Interest }\left(\text{8}\right)\\ \text{= \$10,000 + \$583}\\ \text{=}\text{\$10,583}\end{array}$ (9)

Compute the amount discount on discounting the note:

$\begin{array}{c}\text{Discount = Maturity Value }\times \text{ Rate of interest }\times \text{ Remaining period}\\ \text{ = \$10,000}\times \frac{12}{100}\times \frac{3\left(7-4\right)}{12}\\ =\$317\end{array}$ (10)

Compute the amount of cash proceeds:

$\begin{array}{c}\text{Cash Proceeds = Maturity Value }-\text{ Discount}\left(10\right)\\ \text{=}\text{\$10,583}-\$317\\ =\$10,266\end{array}$ (11)

Compute the loss on sale of notes receivable:

Face value of Notes Receivable	$10,000
Add: Interest Receivable	333
Less: Cash Proceeds	(10,266)
Loss on Sale of Investments	$67

Table (10)

For September 30 – No Entry is required.

(2)

To determine

To prepare: Year-end Adjusting entry.

Explanation of Solution

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Discount		600
	Interest Revenue (12)			600
	(To record the discounting of note receivable)

Table (11)

Compute the amount of interest:

Principal = $8,000

Rate of interest = 10%

Period = 9 Months (March 31 to December 31)

$\begin{array}{c}\text{Interest = Principal }\times \text{ Rate of interest }\times \text{ Interest period}\\ \text{ = \$8,000}\times \frac{10}{100}\times \frac{9}{12}\\ =\$600\end{array}$ (12)

(3)

To determine

To prepare: The effect of all of the above transactions on the net income of 2016.

Explanation of Solution

The effect of all of the above transactions on the net income of 2016 is prepared as follows:

Date	Income Increase (Decrease)	Reasons
February 28	$10,000	Sales Revenue Increases the Net Income
March 31	7,200	Sales Revenue Increases the Net Income
April 3	7,000	Sales Revenue Increases the Net Income
April 11	(140)	Sales Discount Decreases the Net Income
April 17	(5,000)	Sales Returns Decreases the Net Income
April 17	3,200	Cost of Goods Sold Increases the Net Income
April 30	(500)	Loss on Sale of Accounts Receivable Decreases the Net Income
June 30	333	Interest Revenue Increases the Net Income
June 30	(67)	Loss on Sale of Accounts Receivable Decreases the Net Income
December 31	600	Interest Revenue Increases the Net Income
Total	$22,626

Table (12)