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Tutorial 6

Mehl Wholesalers is facing a cash flow problem as it needs $120,000 for payroll but its suppliers are demanding faster payment. To alleviate this, Mehl could factor $125,000 of its accounts receivable at a 1% service charge, raising $123,750 in cash after the fee. Factoring involves selling accounts receivable to a third party at a discount in exchange for immediate cash. Falcetto Company engages in various sales and collection transactions over multiple months. These include credit card sales, accounts receivable sales to customers, and estimating and adjusting bad debt expense based on historical percentages of credit sales written off.

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Muntasir Ahmmed
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552 views

Tutorial 6

Mehl Wholesalers is facing a cash flow problem as it needs $120,000 for payroll but its suppliers are demanding faster payment. To alleviate this, Mehl could factor $125,000 of its accounts receivable at a 1% service charge, raising $123,750 in cash after the fee. Factoring involves selling accounts receivable to a third party at a discount in exchange for immediate cash. Falcetto Company engages in various sales and collection transactions over multiple months. These include credit card sales, accounts receivable sales to customers, and estimating and adjusting bad debt expense based on historical percentages of credit sales written off.

Uploaded by

Muntasir Ahmmed
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial

1. Brule Co. has been in business five years. The ledger at the end of the
current year shows:

Bad debts are estimated to be 10% of receivables. Prepare the entry to adjust the
Allowance for Doubtful Accounts.

If it's 10% of accounts receivable then Allowance for doubtful accounts must be made to
equal 3000 more than what's already there ($2000)

Date Account name and explanation Debit Credit


Bad debt expense 5,000
Allowance for doubtful accounts 5,000
(To adjust the Allowance for doubtful
accounts)

2. Mehl Wholesalers Co. has been expanding faster than it can raise capital.
According to its local banker, the company has reached its debt ceiling. Mehl’s
suppliers (creditors) are demanding payment within 30 days of the invoice date
for goods acquired, but Mehl’s customers are slow in paying (60–90 days). As a
result, Mehl has a cash flow problem.

Mehl needs $120,000 in cash to safely cover next Friday’s payroll. Its balance of
outstanding accounts receivables totals $750,000. What might Mehl do to
alleviate this cash crunch? Record the entry that Mehl would make when it raises
the needed cash.

Assuming that Mehl Wholesalers factors $125,000 of its accounts receivable at a 1%


service charge, it would make the following entry

Date Account name and explanation Debit Credit


Cash 1,23,750
Service Charge Expense 1,250
Accounts Receivables 1,25,000
(To record sale of receivables to factor)

3. Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 12% note dated May
10 in settlement of Leonard’s overdue account.
(a) What is the maturity date of the note?

The maturity date is August 8, computed as follows:

Term of note: 90 days

May (31-10) 21

June 30

July 31

82 days

Maturity date: August 8

(b) What is the entry made by Gambit at the maturity date, assuming Leonard
pays the note and interest in full at that time?

The interest payable at the maturity date is $102, computed as follows.

Face*Rate*Time=Interest

$3,400*12%*90/360=$102

The entry recorded by Gambit Stores at the maturity date is:

Date Account name and explanation Debit Credit


Cash 3,502
Notes Receivable 3,400
Interest Revenue 102
(To record collection of Leonard note)

4. The following selected transactions relate to Falcetto Company.

Mar. 1 Sold $20,000 of merchandise to Potter Company, terms 2/10, n/30.

11 Received payment in full from Potter Company for balance due.

12 Accepted Juno Company’s $20,000, 6-month, 12% note for balance due.

13 Made Falcetto Company credit card sales for $13,200.

15 Made Visa credit card sales totaling $6,700. A 3% service fee is charged by visa.
Apr. 11 Sold accounts receivable of $8,000 to Harcot Factor. Harcot Factor assesses a
service charge of 2% of the amount of receivables sold.

13 Received collections of $8,200 on Falcetto Company credit card sales and added
finance charges of 1.5% to the remaining balances.

May 10 Wrote off as uncollectible $16,000 of accounts receivable. Falcetto uses the
percentage-of-sales basis to estimate bad debts.

June 30 Credit sales recorded during the first 6 months total $2,000,000. The bad debt
percentage is 1% of credit sales. At June 30, the balance in the allowance account is
$3,500.

July 16 One of the accounts receivable written off in May was from J. Simon, who pays
the amount due, $4,000, in full. Prepare the journal entries for the transactions.

Instructions: Prepare the journal entries for the transactions.

Date Account name and explanation Debit Credit


Marc Accounts Receivable-Potter 20,000
h1 Sales 20,000
(To record sales on account)
11 Cash 19,600
Sales Discounts (2%*$20000) 400
Accounts Receivable- Potter 20,000
(To record collection of accounts
receivable)
12 Notes Receivable 20,000
Accounts Receivable-Juno 20,000
(To record acceptance of Juno Company
note)
13 Accounts Receivable 13,200
Sales 13,200
(To record company credit card sales)
15 Cash 6,499
Service Charge Expense (6,700*3%) 201
Sales 6,700
(To record credit card sales)
April Cash 7,840
11 Service Charge Expense (2%*$8000) 160
Accounts Receivable 8,000
(To record sale of receivables to factor)
13 Cash 8,200
Accounts Receivable 8,200
(To record collection of accounts receivable)
Accounts Receivable (13,200-8,200)*1.5% 75
Interest Revenue 75
(To record interest on amount due)
May Allowance for Doubtful Accounts 16,000
10 Accounts Receivable 16,000
(To record write-off of accounts receivable)
June Bad Debts Expense ($2,000,000 *1%) 20,000
30 Allowance for Doubtful Accounts 20,000
(To record estimate of uncollectible
accounts)
July Accounts Receivable—J. Simon 4,000
16 Allowance for Doubtful Accounts 4,000
(To reverse write-off of accounts receivable)
Cash 4,000
Accounts Receivable—J. Simon 4,000
(To record collection of accounts
receivable)

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