Saber Boat Industries, Inc. sells (factors) $840,000 of
Accounts
Receivables with the Blue Water Finance Company on a “with
recourse” basis. Blue Water acquires the receivables on
January
31, 2018 assessing a finance charge of 5%, and also reserving
8%
for covering probable adjustments. In addition, a recourse
liability amounting to a fair value of $15,000 is accrued.
a. Based on the contractual arrangement above, prepare the
journal entry at January 31st for Distribution Industries,
Inc.
Debit Credit
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b. Village Marine provided you with the following financial
information before adjustments as of December 31, 2017:
Debit Credit
Cash 103,764
Accounts Receivable 407,680
Allowance For Doubtful Accounts 3,355
Sales Revenue 2,645,090
Sales Returns and Allowances 16,847
Prepare the year end adjusting entry assuming that the
allowance
for doubtful accounts is to provide for doubtful accounts
based
on 2.5% of gross accounts receivable.
Debit Credit
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Solution :-
a ) :-
Date | Particulars | Debit | Credit |
January 31, 2018 |
Cash |
= $840,000 + $15,000 - 67,200 - 42,000 = $745,800 |
|
Provision for doubtful debts |
= $840,000 * 8% = $67,200 |
||
Finance charge |
= $840,000 * 5% = $42,000 |
||
Recourse liability | $15,000 | ||
Accounts receivable | $840,000 | ||
( To record factoring of account receivable ) |
b ) :-
Date | Particulars | Debit | Credit |
December 31, 2017 | Allowance for doubtful debtors | $3,355 | |
To account receivable | $3,355 | ||
Sales return & allownces | $16,847 | ||
To account receivable | $16,847 | ||
Provision for doubtful accounts |
= $407,680 * 2.5% = $10,192 |
||
To account receivable | $10,192 |
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