Question

evergreen company sells lawn and garden products to wholesalers. the company's fiscal year-end is december 31. during 2024, the following transactions related to receivables occurred:Feb. 28 Sold merchandise to Lennox, Inc., for $20,000 and accepted a 12%, 7-month note. 12% is an appropriate rate for this type of note.Mar. 31 Sold merchandise to Maddox Co. that had a fair value of $15,840, and accepted a noninterest-bearing note for which $18,000 payment is due on March 31, 2022.Apr. 3 Sold merchandise to Carr Co. for $17,000 with terms 4/10, n/30. Evergreen uses the gross method to account for cash discounts.Apr. 11 Collected the entire amount due from Carr Co.Apr. 17 A customer returned merchandise costing $4,700. Evergreen reduced the customer’s receivable balance by $6,500, the sales price of the merchandise. Sales returns are recorded by the company as they occur.Apr. 30 Transferred receivables of $65,000 to a factor without recourse. The factor charged Evergreen a 3% finance charge on the receivables transferred. The sale criteria are met.June 30 Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 14%. The note was discounted without recourse.Sep. 30 Lennox, Inc., paid the note amount plus interest to the bank.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, 2021. Adjusting entries are only recorded at year-end.3. Prepare a schedule showing the effect of the journal entries on 2021 income before taxes.

Answer 1

Journal entries for Evergreen Company's receivable transactions include recording sales on account, note collections, customer returns, and the transfer of receivables to a factor. Adjusting entries would be needed at year-end for accrued interest or bad debts. The effect on income before taxes is determined by summing revenues and subtracting allowable deductions related to receivables.

Step-by-step explanation:

Journal Entries for Evergreen Company

The Evergreen Company's transactions involving receivables can be recorded with the following journal entries:

• Feb. 28: Debit Notes Receivable $20,000; Credit Sales Revenue $20,000 (to record the sales made to Lennox, Inc. with a 12%, 7-month note).
• Mar. 31: Debit Notes Receivable $18,000; Credit Sales Revenue $15,840; Credit Interest Revenue ($18,000 - $15,840) (to record the sale to Maddox Co. on a noninterest bearing note due in one year).
• Apr. 3: Debit Accounts Receivable $17,000; Credit Sales Revenue $17,000 (for sale to Carr Co.on account).
• Apr. 11: Debit Cash $16,320 ($17,000 less 4% discount); Credit Accounts Receivable $17,000 (collection from Carr Co. within discount period).
• Apr. 17: Debit Sales Returns and Allowances $6,500; Credit Inventory $4,700; Credit Cost of Goods Sold $1,800 (to record customer return of merchandise).
• Apr. 30: Debit Cash $63,050 ($65,000 minus 3% finance charge); Debit Finance Charge Expense $1,950; Credit Accounts Receivable $65,000 (to record transfer of receivables to a factor).
• June 30: Debit Cash and Interest Revenue for the net proceeds of the note; Debit Discount on Notes Receivable for the bank's discount; Credit Notes Receivable $20,000 (to record discounting of the note).

Adjusting entries for Dec. 31, 2021, would include recognition of any accrued interest on notes receivable or any adjustments for bad debts, which are not detailed in the provided transactions.

Effect on 2021 Income before Taxes

The effect on income before taxes would be calculated by summing the Sales Revenue, Interest Revenue, and subtracting Sales Returns and Allowances, and any finance charge or discount expense related to the receivables transactions.

Answer 2

This answer provides the necessary journal entries for the given transactions related to receivables in the Evergreen company, along with any required adjusting entries at year-end and the effect of these journal entries on 2021 income before taxes.

Step-by-step explanation:

1. Journal entries:

Feb. 28:

• Debit: Notes receivable - Lennox, Inc. $20,000
• Credit: Sales $20,000

Mar. 31:

• Debit: Notes receivable - Maddox Co. $15,840
• Credit: Sales $15,840

Apr. 3:

• Debit: Accounts receivable - Carr Co. $17,000
• Credit: Sales $17,000

Apr. 11:

• Debit: Cash $16,300
• Debit: Sales discounts $700
• Credit: Accounts receivable - Carr Co. $17,000

Apr. 17:

• Debit: Sales returns and allowances $6,500
• Credit: Accounts receivable $6,500

Apr. 30:

• Debit: Cash $63,050
• Debit: Finance charge expense $1,950
• Credit: Accounts receivable $65,000

June 30:

• Debit: Cash $19,680
• Debit: Discount on notes receivable - Lennox, Inc. $320
• Credit: Notes receivable - Lennox, Inc. $20,000

Sep. 30:

• Debit: Cash $22,960
• Credit: Notes receivable - Lennox, Inc. $20,000
• Credit: Interest revenue $2,960

2. Adjusting entries at December 31, 2021:

• Debit: Bad debt expense $x
• Credit: Allowance for doubtful accounts $x

3. Effect of journal entries on 2021 income before taxes:

• Record the sales and discounts in the sales revenue and sales discounts accounts.
• Record the finance charge expense in the income statement.
• Record the interest revenue from the note and any bad debt expense and allowance for doubtful accounts.