EXERCISE 7-5 (15-20 minutes)

Sales recorded at gross:

(a) July 1

Accounts Receivable
82,000
Sales Revenue.........................................................
82,000

July 5

Sales Returns and Allowances........................................

6,200
Accounts Receivable
6,200

July 10 Cash ..................................................................................

74,284
Sales Discounts ($75,800 X 2%)......................................
1,516
Accounts Receivable
75,800
July 17 Accounts Receivable
160,000
Sales Revenue.........................................................
160,000
July 26 Cash ...................................................................................
78,400
Sales Discounts ($160,000 X .5 X 2%).............................
1,600
Accounts Receivable..............................................
80,000
Aug. 30 Cash ...................................................................................
80,000
Accounts Receivable..............................................
80,000
Sales recorded at net:
(b) July 1

Accounts Receivable
80,360
Sales Revenue.........................................................
80,360
($82,000 X .98)

July 5

Sales Returns and Allowances........................................

6,076
Accounts Receivable
6,076
($6,200 X .98)

July 10 Cash ..................................................................................

74,284
Accounts Receivable
74,284

July 17 Accounts Receivable

156,800
Sales Revenue.........................................................
156,800
($160,000 X .98)
July 26 Cash ...................................................................................
78,400
Accounts Receivable..............................................
78,400
Aug. 30 Cash ...................................................................................
80,000
Sales Discounts Forfeited ......................................
1,600
Accounts Receivable..............................................
78,400
(Sales discounts forfeited could have been recognized at the
time the discount period lapsed. The company, however,
would probably not record this forfeiture until final cash
settlement.)
EXERCISE 7-13 (20-25 minutes)
(a) Interest bearing note Option 1:
September 30, 2014
Notes Receivable..............................................................
105,000
Accounts Receivable..............................................105,000
December 31, 2014
Interest Receivable ..........................................................
2,100
Interest Income........................................................ 2,100
($105,000 X 8% X 3/12)
September 30, 2015
Cash ..................................................................................
113,400
Interest Receivable.................................................. 2,100
Interest Income........................................................ 6,300
Notes Receivable.....................................................105,000
($105,000 X 8% X 9/12 = $6,300)

(b) Non-interest bearing note Option 2:

September 30, 2014
Notes Receivable..............................................................
105,000
Accounts Receivable..............................................105,000
December 31, 2014
Notes Receivable..............................................................
2,100
Interest Income........................................................ 2,100
($105,000 X 8% X 3/12)
September 30, 2015
Notes Receivable..............................................................
6,300
Interest Income........................................................ 6,300
($105,000 X 8% X 9/12)
Cash ..................................................................................
113,400
Notes Receivable.....................................................113,400
(a)

There is no difference in the amount of interest income earned in

2014 and 2015 because both options bear interest at 8%. The noninterest bearing note has the interest included in the face amount of
the note and is journalized to account for this. The actual interest
earned is the same under both options.

(b)

The liquidity of Big Corp. at December 31, 2014 will remain

unchanged whichever option is selected. Under option 1, the note
balance remains at $105,000 but interest receivable of $2,100 results
in a total of $107,100 under current assets. Under Option 2, the
balance of the note, after recording the accrual of interest income is
also $107,100 under current assets. The cash flows will also be the
same under both options as the amount collected at the maturity of
the note is $113,400.

EXERCISE 7-19 (15-20 minutes)

(a) To be recorded as a sale under IFRS, all of the following
conditions must be met:
1.

The transferred assets have been isolated from the

transferor (put beyond reach of the transferor and its
creditors even in bankruptcy or receivership).

2.

The transferee has obtained the right to pledge or to sell

either the transferred assets or beneficial interests in
the transferred assets.

(b) Calculation of net proceeds:

Cash received ($600,000 X 92.25%)
Due from factor ($600,000 X 5.25%)
Less: Recourse obligation
Net proceeds
Calculation of gain or loss:
Carrying amount of receivables
Net proceeds
Loss on sale of receivables

$553,500
31,500 $585,000
6,000
$579,000
$600,000
579,000
$ 21,000

Note: Loss on sale of receivables can also be calculated as the

finance expense assessed plus the fair value of the recourse
obligation (in this case, [$600,000 X 2.5%] + $6,000 = $21,000).
The following journal entry would be recorded on August 15, 2014:
Cash..........................................................................
553,500
Due from Factor.......................................................
31,500
Loss on Sale of Receivables..................................
21,000
Recourse Liability............................................
6,000
Accounts Receivable.......................................
600,000
(c)

Factoring the accounts receivable will improve the accounts

receivable turnover ratio, if it were calculated on August 15,
2014, immediately after recording the entry in (b) above. The
balance of accounts receivable used in the denominator will be

reduced by the average of $600,000 and any amounts factored at

the other date(s) used in determining the average accounts
receivable, thereby making the ratio higher. If, on the other hand,
the calculation is made well after the factoring transaction, for
example, at the fiscal year end, the balances of sales and
average accounts receivable would be unaffected by this
transaction and therefore the accounts receivable turnover ratio
would not be affected.
(b) To be recorded as a sale under ASPE, all of the following
conditions must be met:
1. The transferred assets have been isolated from the transferor
(put beyond reach of the transferor and its creditors even in
bankruptcy or receivership).
2. The transferee has obtained the right to pledge or to sell
either the transferred assets or beneficial interests in the
transferred assets.
3. The transferor does not maintain effective control over the
transferred assets through an agreement to repurchase or
redeem them before their maturity.
PROBLEM 7-2
(a) Sales
Sales discounts
Sales returns and allowances
Net sales
Percentage
Bad debt expense

$1,980,000
4,400
60,000
1,915,600
1 1/2%
$ 28,734

(b) Accounts receivable

Amounts estimated to be uncollectible
Net realizable value

$1,790,000
(160,000)
$1,630,000

(c) Allowance for doubtful accounts 1/1/14

Establishment of accounts written off in prior

$37,000
18,000

years (recovery)
Customer accounts written off in 2014
Bad debt expense for 2014 ($3,200,000 X 4.5%)
Allowance for doubtful accounts 12/31/14
(d) Bad debt expense for 2014
Customer accounts written off as uncollectible
during 2014
Allowance for doubtful accounts balance
12/31/14
Accounts receivable, net of allowance for
doubtful accounts
Allowance for doubtful accounts balance
12/31/14
Accounts receivable, before deducting
allowance for doubtful accounts

(36,000)
144,000
$163,000
$92,000
(24,000)
$68,000

$ 950,000
68,
000
$1,018,000

(e) Accounts receivable

Percentage
Allowance for doubtful accounts (ending bal.)
Allowance for doubtful accounts (debit bal.)
Bad debt expense

$610,000
7%
42,700
34,000
$ 76,700

PROBLEM 7-5
Bad Debt Expense
Accounts Receivable
(To correct bad debt expense and
write off accounts receivable)

2,740

Accounts Receivable
Unearned Revenue
(To reclassify credit balance in
accounts receivable)

4,840

2,740

4,840

Allowance for Doubtful Accounts

Accounts Receivable
(To write off $4,200 of uncollectible
accounts)

4,200
4,200

(Note to instructor: Many students will not make this entry at this
point. Because $4,200 is totally uncollectible, a write off immediately
seems most appropriate. The remainder of the solution therefore
assumes that the student made this entry.)
Allowance for Doubtful Accounts
Bad Debt Expense
(To reduce allowance for doubtful
account balance)

7,975
7,975

Balance ($8,750 + $18,620 $2,740 $4,200)

Corrected balance (see below)
Adjustment

$20,430
12,455
$ 7,975

Age

Balance

Aging
Sch.

Under 60 days
61-90 days
91-120 days
Over 120 days

$172,342
141,330 ($136,490 + $4,840)
37,184 ($39,924 $2,740)
19,444 ($23,644 $4,200)

1%
3%
7%
20%

$ 1,723.42
4,239.90
2,602.88
3,888.80
$12,455.00

If the student did not make the entry to record the $4,200 writeoff
earlier, the following would change in the problem. After the adjusting
entry for $7,975, an entry would have to be made to write off the
$4,200.
Balance ($8,750 + $18,620 $2,740)
Corrected balance (see below)
Adjustment

$24,630
16,655
$ 7,975

Age

Balance

Aging
Schedule

Under 60 days
61-90 days
91-120 days
Over 120 days

$172,342
141,330
37,184
23,644

1%
3%
7%

$ 1,723.42
4,239.90
2,602.88
8,088.80*
$16,655.00

*$4,200 + (20% X $19,444)

PROBLEM 7-7
(a)
October 1, 2014
Notes Receivable
Sales Revenue

150,000
150,000
December 31, 2014

Interest Receivable
Interest Income
($150,000 X 10% X 3/12)

3,750
3,750

October 1, 2015
Cash

15,000
Interest Receivable
Interest Income
($150,000 X 10% X 9/12)

3,750
11,250

December 31, 2015

Interest Receivable
Interest Income
($150,000 X 10% X 3/12)

3,750
3,750

October 1, 2016
Cash

165,000

Interest Receivable
Interest Income
Notes Receivable
($150,000 X 10% X 9/12 = $11,250)

3,750
11,250
150,000

(b)
October 1, 2014
Notes Receivable
Sales Revenue

150,000
150,000
December 31, 2014

Interest Receivable
Interest Income
($150,000 X 10% X 3/12)

3,750
3,750

January 1, 2015
Interest Income
Interest Receivable

3,750
3,750

October 1, 2015
Cash

15,000
Interest Income

15,000
December 31, 2015

Interest Receivable
Interest Income
($150,000 X 10% X 3/12)

3,750
3,750

January 1, 2016
Interest Income
Interest Receivable

3,750
3,750

October 1, 2016
Cash

165,000
Interest Income
Notes Receivable

15,000
150,000

PROBLEM 7-11
Ibran Corp.
INCOME STATEMENT EFFECT
For the year ended December 31, 2014
Expenses resulting from accounts receivable
assigned (Schedule 1)
Loss resulting from accounts receivable sold
($300,000 $275,000)
Total expenses

$28,920
25,000
$53,920

Schedule 1
Calculation of Expense
for Accounts Receivable Assigned
Assignment expense:
Accounts receivable assigned
Advance by Provincial Finance
Interest expense
Total expenses

$600,000
X 90%
540,000
X
3%

$16,200
12,720
$28,920

Note: In transaction No. 3 there is no income effect as there is no

interest expense incurred since the advance was received on
December 31, 2014.

P 7-13
(a)
Cash..........................................................................
53,400
Due from Factor.......................................................
3,000 *
Loss on Sale of Receivables...................................
10,600**
Recourse Liability............................................
Accounts Receivable.......................................
* ($60,000 X 5%)
** ($60,000 X 6%) + Recourse Liability of $7,000

7,000
60,000

(b)
Accounts Receivable:
Balance December 31, 2013
Add credit sales during 2014
Less collections on account 2014
Less accounts receivable factored
Less writeoffs during 2014
Add receivable for post-dated cheque from cash
Balance December 31, 2014

$ 90,000
550,000
(500,000)
(60,000)
(3,200)
2,000
$ 78,800

Allowance for Doubtful Accounts:

Balance December 31, 2013
Less writeoffs during 2014
Add bad debt expense accrual (plug)
Balance December 31, 2014

$ 8,500
(3,200)
6,700
$ 12,000

(c)
Current Assets
Cash
Accounts receivable
Allowance for doubtful accounts
Interest receivable
Due from factor
Notes receivable
Inventory
Prepaid expenses

$ 12,900*
$78,800
(12,000)

66,800
3,267**
3,000
80,000
80,000
100

Total current assets

$ 246,067

* ($15,000 - $2,000 - $100)

**($80,000 X 7% X 7/12)
(d)
Current Ratio =
2014 =
=
2013 =
=
* ($20,000 + $90,000 - $8,500 + $85,000)

Current Assets
Current Liabilities
$246,067
$86,000
2.86
$186,500*
$80,000
2.33

(e)
Accounts Receivable Turnover =
2014 =
=
2013 =

Credit Sales
Average Receivables
$550,000
($81,500 + $66,800)/2
7.42 times
3.8 times

Alternatively, the credit sales could be increased by the June 1

$80,000 sales to a major customer, and the outstanding Note
Receivable should then be included in determining the average
accounts receivable balance. This reduces the turnover in 2014 to
5.52 ($630,000 $114,150), still an improvement over the 2013 ratio.
(f) Both liquidity ratios show improvement from 2013 to 2014.

(g)
Current Ratio =
2014 =
=
=

Current Assets
Current Liabilities
$246,067 + $43,600*
$86,000 + $33,000**
$289,667
$119,000
2.43

* ($60,000 $13,400 - $3,000) Factored Receivable less decrease in

Cash received less Due from Factor
** ($40,000 - $7,000) Additional Loan less Recourse Liability
Accounts Receivable Turnover =

Credit Sales
Average Receivables
2014 =
$550,000
[$81,500 + ($66,800 + $60,000)]/2
=

= 5.28 times

As demonstrated by the above recalculated ratio, if $40,000 of the

receivables had been assigned instead of $60,000 factored, the
current ratio in 2014 would be 2.43 instead of 2.86 as calculated above
in (d).
The accounts receivable turnover ratio would have shown a dramatic
deterioration from 7.42 under the factoring scenario to 5.28 times
under the assignment. (If the $80,000 Note Receivable were included
in the 2014 ending receivables balance, this would increase the
numerator by $80,000 and the denominator by an additional $40,000
and reduce the turnover still further to 4.37 times from 5.52.)
These significant differences explain why companies often tend to prefer the effects of
factoring on key ratios rather than the effects of assigning receivables.