During its second year of operations, Shank Corporation found itself in financia

Question

During its second year of operations, Shank Corporation found itself in financial difficulties. Shank decided to use its accounts receivable as a means of obtaining cash to continue operations. On July 1, 2011, Shank sold $75,000 of accounts receivable for cash proceeds of $69,500. No bad debt allowance was associated with these accounts. On December 17, 2011, Shank assigned the remainder of its accounts receivable, $250,000 as of that date, as collateral on a $125,000, 12% annual interest rate loan from Sandy Finance Company. Shank received $125,000 less a 2% finance charge. Additional information is as follows:

Allowance for Bad Debts, 12/31/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,200 (credit)

Estimated Uncollectibles, 12/31/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3% of Accounts Receivable

Accounts Receivable (not including factored and assigned accounts), 12/31/11 .    $50,000

None of the assigned accounts has been collected by the end of the year.

Instructions:

1. Prepare the journal entries to record the receipt of cash from the (a) sale and

(b) Assignment of the accounts receivable.

2. Prepare the journal entry necessary to record the adjustment to Allowance for Bad Debts.

3. Prepare the Accounts Receivable section of Shank’s balance sheet as it would appear after the above transactions.

4. What entry would be made on Shank’s books when the sold accounts have been collected?

Explanation / Answer

1.Journal entries for for recording of cash receipt from

A. Sale of accounts receivable on 1st July 2011

Cash A/c . _Dr. 69500

Discount A/c_Dr. 5500

To accounts receivable A/c. 75000

B. For assignment of accounts receivable on17 December 2011:-

Cash A/c. Dr. 122500

Financial charges. Dr. 2500

To loan from Sandy finance company. 125000

For Assignment of accounts receivable

Accounts receivable assigned. Dr. 250000

To accounts receivable. 250000

2.Journal entries for adjustment of bad debts

Bad Debts Expenses A/c. Dr. 5800

To allowance for doubtful debt A/c. 5800

Calculations

Estimated uncollectible 250000+50000=300000*3/100=9000

Bad debt expenses =9000-3200=5800

3.Balance Sheet :-

Accounts Receivable shown in Current assets

Accounts Receivable assigned. 250000

Not assigned Accounts receivable. 50000

= 300000

- allowance for doubtful debt. -5800

= 294200

4. Sold Account collerted

Cash .A/c. _Dr. 175000

To Accounts Receivable A/c. 1750000

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