Chapter 6, Problem 15P

Comprehensive Receivables Problem Blackmon Corporation’s December 31, 2018, balance sheet disclosed the following information relating to its receivables:

*The company has a recourse liability of $700 related to a note receivable sold to a bank.

During 2019, credit sales (terms, n/EOM) totaled $2,200,000, and collections on accounts receivable (unassigned) amounted to $1,900,000. Uncollectible accounts totaling $18,000 from several customers were written off, and a $1,350 accounts receivable previously written off was collected. Additionally, the following transactions relating to Blackmon’s receivables occurred during the year:

On December 31, 2019, an aging of the accounts receivable balance indicated the following:

Required:

1. 1. Prepare the journal entries to record the preceding receivable transactions during 2019 and the necessary adjusting entry on December 31, 2019. Assume a 360-day year for interest calculations and round calculations to the nearest dollar.
2. 2. Prepare the receivables portion of Blackmon’s December 31, 2019, balance sheet.
3. 3. Next Level Compute Blackmon’s accounts receivable turnover in days, assuming a 360-day business year. What is your evaluation of its collection policies?
4. 4. If Blackmon uses IFRS, what might be the heading of the section for the receivables reported in Requirement 2?

To determine

Journalize the entries to record the previous receivables transaction and prepare the necessary adjusting entry on December 31, 2019.

Explanation of Solution

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.

Prepare journal entries:

Date	Account Title and Explanation	Debit	Credit
	Accounts receivable	$2,200,000
	Sales revenue		$2,200,000
	(To record the sale on credit)

Table (1)

Date	Account Title and Explanation	Debit	Credit
	Cash	$1,900,000
	Accounts receivable		$1,900,000
	( To record payment received)

Table (2)

Date	Account Title and Explanation	Debit	Credit
	Allowance for doubtful accounts	$18,000
	Accounts receivable		$18,000
	(To record accounts receivables written- off)

Table (3)

Date	Account Title and Explanation	Debit	Credit
	Accounts receivable	$1,350
	Allowance for doubtful accounts		$1,350
	(To record accounts receivables written- off)

Table (4)

Date	Account Title and Explanation	Debit	Credit
March 6	Cash	$1,350
	Accounts receivable		$1,350
	(To record cash collected on accounts)

Table (5)

Date	Account Title and Explanation	Debit	Credit
March 6	Cash	$12,460
	Notes  receivable		$12,000
	Interest income		$460
	(To record the cash collected from notes receivable along with interest)

Table (6)

Date	Account Title and Explanation	Debit	Credit
March 31	Recourse liability	$700
	Gain from sale of note		$700
	(To record the fair value of recourse liability)

Table (7)

Date	Account Title and Explanation	Debit	Credit
May 1	Notes Receivable	$4,800
	Accounts receivable		$4,800
	(To record the notes receivable)

Table (8)

Date	Account Title and Explanation	Debit	Credit
May 18	Notes receivable	$6,900
	Sales revenue		$6,900
	(To record the receipt of the interest bearing note)

Table (10)

Date	Account Title and Explanation	Debit	Credit
June 2	Cash $(\$4,836.62(1)+\$6,899.71(6))$	$11,736
	Loss from sale of receivable $(\$668.85(1)+\$934.79(6))$	$1,603
	Notes receivable $(\$4,800(1)+\$6,900(6))$		$11,700
	Interest income $(\$55.47(1)+\$34.50(6))$		$89.97
	Recourse liability		$1,550
	(To record the factoring of accounts receivable)

Table (11)

Note: For the values of amount refer to Table (26) and Table (27)

Date	Account Title and Explanation	Debit	Credit
July 1	Cash (balancing figure)	$114,000
	Assignment service charge expense	$5,000
	Notes payable (11)		$119,000
	(To record the assignment service charge expense)

Table (12)

Date	Account Title and Explanation	Debit	Credit
July 1	Accounts receivable assigned	140,000
	Accounts receivables		140,000
	( To record the remaining accounts owed)

Table (13)

Date	Account Title and Explanation	Debit	Credit
July 6	Return liability	2,500
	Accounts receivable assigned		2,500
	(To record the return liability of accounts receivable assigned)

Table (14)

Date	Account Title and Explanation	Debit	Credit
July 13	Return liability	800
	Accounts receivable assigned		800
	(To record the return liability of accounts receivable assigned)

Table (15)

Date	Account Title and Explanation	Debit	Credit
July 31	Cash	50,000
	Accounts receivable assigned		50,000
	(To record the receipt of accounts receivable assigned)

Table (16)

Date	Account Title and Explanation	Debit	Credit
July 31	Notes payable	50,000
	Interest expense (12)	1,785
	Cash		51,785
	(To record the interest expense on notes payable)

Table (17)

Date	Account Title and Explanation	Debit	Credit
August 31	Cash	60,000
	Accounts receivable assigned		60,000
	(To record the receipt of cash)

Table (18)

Date	Account Title and Explanation	Debit	Credit
August 31	Notes payable (15)	69,000
	Interest expense (13)	1,035
	Cash		70,035
	(To record the interest expense on notes payable)

Table (19)

Date	Account Title and Explanation	Debit	Credit
August 31	Accounts receivable	26,700
	Accounts receivable assigned		26,700
	(To record the accounts receivable assigned)

Table (20)

Note: $\$26,700=\$140,000-\$2,500-\$800-\$50,000-\$60,000$

Date	Account Title and Explanation	Debit	Credit
August 31	Recourse liability	900
	Gain from sale of notes		900
	(To record the fair value of recourse liability)

Table (21)

Date	Account Title and Explanation	Debit	Credit
September 1	Notes receivable dishonored	4,383
	Recourse liability	650
	Cash (14)		5,033
	(To record the notes dishonored)

Table (22)

Date	Account Title and Explanation	Debit	Credit
September 4	Cash (14)	5,033
	Notes receivables dishonored		4,383
	Gain from collection of dishonored note		650
	(To record the )

Table (23)

Date	Account Title and Explanation	Debit	Credit
December 31	Cash	5,000
	Interest income		5,000
	(To record the interest income)

Table (24)

Date	Account Title and Explanation	Debit	Credit
December 31	Bad debt expense $(\$16,205(15)+\$1,650)$	17,855
	Allowance for doubtful accounts		17,855
	(To record the bad debt expenses of the period)

Table (25)

Working note:

(1) Calculate the amount of loss from receivable:

Particulars	Amount ($)
Face value of the note	4,800
Interest to maturity (2)	208
Maturity value of note	5,008
Less: Discount (3)	(171.38)
Proceeds	4,836.62
Less: Book value of note (4)	(4,855.47)
Recourse liability	(650)
Loss from sale of receivable	(668.85)

Table (26)

(2) Calculate the interest to maturity:

$\begin{array}{c}\text{Interest}\text{to}\text{maturity}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{on}\text{May1}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\text{Time}\text{period}\end{array}\right)\\ \text{=\$4,800}\text{×13\%×}\frac{\text{120}\text{days}}{\text{360}\text{days}}\\ \text{=\$624×}\frac{\text{120}\text{days}}{\text{360}\text{days}}\\ \text{=\$208}\end{array}$

(3) Calculate the amount of discount:

$\begin{array}{c}\text{Discount}\text{=}\left(\begin{array}{l}\text{Maturity}\text{value}\text{of}\text{note}\\ \text{×}\text{percentage}\text{of}\text{interest}\\ \text{×Time}\text{period}\end{array}\right)\\ \text{=\$5,008×14\%×}\left(\frac{88}{\text{360days}}\right)\\ \text{=\$701}\text{.12}\text{×}\frac{\text{88}}{\text{360days}}\\ \text{=\$171}\text{.38}\end{array}$

Note: 88 days is calculated by subtracting 120 days from 32 days (May 1 to June 2).

(4) Calculate the book value of note:

$\begin{array}{c}\begin{array}{l}\text{Book}\text{value}\\ \text{of}\text{note}\end{array}\}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{+}\\ \text{Accrued}\text{interest}\text{income}\end{array}\right)\\ \text{=\$4,800}\text{+}\text{\$55}\text{.47}\text{(5)}\\ \text{=\$4,855}\text{.47}\end{array}$

(5) Calculate accrued interest income:

$\begin{array}{c}\begin{array}{l}\text{Accrued}\text{interest}\\ \text{income}\end{array}\}\text{=}\left(\begin{array}{l}\text{Note}\text{received}\text{on}\text{May 1×}\\ \text{Percentage}\text{of}\text{interest}\text{rate}\text{×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$4,800×}\text{13\%×}\frac{32\text{days}}{\text{360}\text{days}}\\ \text{=\$624×}\frac{\text{20}\text{days}}{\text{360}\text{days}}\\ \text{=\$55}\text{.47}\end{array}$

Note: 20 days is calculated from November 1 to November 20.

(6) Calculate the amount of loss from receivable of Company E:

Particulars	Amount ($)
Face value of the note	6,900
Interest to maturity (7)	207
Maturity value of note	7,107
Less: Discount (8)	(207.29)
Proceeds	6,899.71
Less: Book value of note (9)	(6,934.50)
Recourse liability	(900)
Loss from sale of receivable	(934.79)

Table (27)

(7) Calculate the interest to maturity:

$\begin{array}{c}\text{Interest}\text{to}\text{maturity}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{on}\text{May18}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\text{Time}\text{period}\end{array}\right)\\ \text{=\$6,900}\text{×12\%×}\frac{90\text{days}}{\text{360}\text{days}}\\ \text{=\$828×}\frac{\text{120}\text{days}}{\text{360}\text{days}}\\ \text{=\$207}\end{array}$

(8) Calculate the amount of discount:

$\begin{array}{c}\text{Discount}\text{=}\left(\begin{array}{l}\text{Maturity}\text{value}\text{of}\text{note}\\ \text{×}\text{percentage}\text{of}\text{interest}\\ \text{×Time}\text{period}\end{array}\right)\\ \text{=\$7,107×14\%×}\left(\frac{75}{\text{360days}}\right)\\ \text{=\$994}\text{.98×}\frac{75}{\text{360days}}\\ \text{=\$207}\text{.29}\end{array}$

Note: 75 days is calculated by subtracting 90 days from 15 days (May 18 to June 2).

(9) Calculate the book value of note:

$\begin{array}{c}\begin{array}{l}\text{Book}\text{value}\\ \text{of}\text{note}\end{array}\}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{+}\\ \text{Accrued}\text{interest}\text{income}\end{array}\right)\\ \text{=\$6,900}\text{+}\text{\$34}\text{.50}\text{(10)}\\ =\$6,934.50\end{array}$

(10) Calculate accrued interest income:

$\begin{array}{c}\begin{array}{l}\text{Accrued}\text{interest}\\ \text{income}\end{array}\}\text{=}\left(\begin{array}{l}\text{Note}\text{received}\text{on}\text{May 18×}\\ \text{Percentage}\text{of}\text{interest}\text{rate}\text{×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$6,900×}\text{12\%×}\frac{15\text{days}}{\text{360}\text{days}}\\ \text{=\$828×}\frac{\text{20}\text{days}}{\text{360}\text{days}}\\ \text{=\$34}\text{.50}\end{array}$

Note: 20 days is calculated from November 1 to November 20.

(11) Calculate the advance amount of accounts receivable:

$\begin{array}{c}\begin{array}{l}\text{Advance}\text{amount}\text{of}\text{accounts}\\ \text{receivable}\text{assigned}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{accounts}\text{receivable}\text{assigned}\text{×}\text{Percentage}\\ \text{of}\text{advance}\text{amount}\text{of}\text{accounts}\text{receivable}\text{assigned}\end{array}\right)\\ \text{=}\text{\$140,000×85\%}\\ \text{=\$119,000}\end{array}$

(12) Calculate the amount of interest expense on July 31:

$\begin{array}{c}\text{Interest}\text{Expense}\text{=}\left(\begin{array}{l}\text{Advance}\text{amount}\text{of}\text{accounts}\\ \text{receivable}\text{assigned}\text{×}\text{Percentage}\text{of}\text{interest}\end{array}\right)\\ \text{=\$119,000×1}\text{.5\%}\\ \text{=\$1,785}\end{array}$

(13) Calculate the interest expense on August 31:

$\begin{array}{c}\text{Interest}\text{Expense}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{accounts}\text{receivable}\\ \text{assigned}\text{×}\text{Percentage}\text{of}\text{interest}\end{array}\right)\\ \text{=\$69,000×1}\text{.5\%}\\ \text{=\$1,035}\end{array}$

(14) Calculate the amount of cash on September 1:

$\begin{array}{c}\text{Cash}\text{=}\left[\text{Notes}\text{receivable}\text{+}\left(\begin{array}{l}\text{Notes}\text{receivables}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\\ \text{Time}\text{period}\end{array}\right)\text{+Charges}\right]\\ \text{=}\text{\$4,800+(\$4,800×13\%×}\frac{\text{120}}{\text{360}}\text{)+\$25}\\ \text{=\$4,800+\$208+\$25}\\ \text{=\$5,033}\end{array}$

(15) Calculate the amount of cash on August 1:

$\begin{array}{c}\text{Cash=}\left(\begin{array}{l}\text{Advance}\text{amount}\text{of}\text{accounts}\text{receivable}\\ \text{assigned}-\text{Assigned}\text{accounts}\text{collected}\end{array}\right)\\ \text{=\$119,000}\text{(11)}-\text{\$50,000}\\ \text{=\$69,000}\end{array}$

To determine

Prepare the receivable portion of Company B as on December 31, 2019.

Explanation of Solution

Receivables portion of Company B is prepared as follows:

Particulars	Amount	Amount
Accounts receivables (16)	$408,900
Less: Allowance for doubtful accounts  (16)	($16,205)
		$392,695
Notes receivables		$38,000
Total receivables		$430,695

Table (28)

Working note:

(16) Calculate the estimated total amount of uncollectible:

Age	Amount (a)	Estimated Percentage uncollectible (b)	Estimated amount of uncollectible $\text{(c)}\text{=}\text{(a)×(b)}$
Under 30 days	$240.487	0.5%	1,202
30–60 days	$113,421	1.5%	1,701
61–90 days	$30,933	8.0%	2,475
91–240 days	$17,185	35%	6,015
Over 240 days	$6,874	70%	4,812
	$408,900		$16,205

Table (29)

To determine

Calculate the accounts receivable turnover in days and analyze its collection policy.

Explanation of Solution

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In other words, it indicates the number of times the average amount of net accounts receivables collected during a particular period.

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average.

Calculate the receivables turnover in days:

$\begin{array}{c}\begin{array}{l}\text{Receivables}\\ \text{turnover}\text{in}\text{days}\end{array})\text{=}\frac{\text{365}}{\text{Accounts receivable turnover}}\\ \text{=}\frac{\text{365}}{\text{7}\text{.07 times}\text{(17)}}\\ \text{=51 days}\end{array}$

The receivables turnover in days for Corporation B is 51 days and it seems to be slow, therefore, the company must be very violent in its collection policies.

Working note:

(17) Compute the receivables turnover ratio:

$\begin{array}{c}\begin{array}{l}\text{Accounts}\text{receivable}\\ \text{turnover}\text{ratio}\end{array}\}\text{=}\frac{\text{Net}\text{sales}\text{on}\text{account}}{\text{Average}\text{accounts}\text{receivable}\left(\text{net}\right)}\\ \text{=}\frac{\text{\$2,200,000}}{\text{\$311,348}\text{(18)}}\\ \text{=7}\text{.07}\text{times}\end{array}$

(18) Calculate average accounts receivable (net):

$\begin{array}{c}\begin{array}{l}\text{Average}\text{accounts}\\ \text{receivable}\text{(net)}\end{array}\}\text{=}\frac{\left[\left(\begin{array}{l}\text{Balance}\text{in}\text{accounts}\text{receivable}-\\ \text{Allowance}\text{for}\text{doubtful}\text{accounts}\end{array}\right)\text{+Net}\text{accounts}\text{receivable}\right]}{2}\\ \text{=}\frac{\left(\text{\$408,900}-\text{\$16,205}\right)\text{+230,000}}{2}\\ \text{=}\frac{\text{\$622,695}}{2}\\ =\$311,348\end{array}$

To determine

State the heading for the accounts receivable section in requirement 2, if Company B uses IFRS.

Explanation of Solution

“Loans and Receivables” can be used as the heading for the accounts receivables section, if Company B uses IFRS.