P8-7. Scheduling interest received (LO 8-4)
Effective interest table in 000’s
( a ) ( b ) ( c ) ( d )
Date
Interest
income –
prior (d) x
11.12%)
Note
payment
received
(given)
Total
cash
received
(a) + (b)
Note
receivable –
prior (d)
less (b)
12/31/2018:
12/31/2019:
12/31/2020:
12/31/2021:
12/31/2022:
12/31/2023:
P8-8. Imputing interest on a nominal interest-bearing note and fair
value option (LO 8-4, LO 8-5)
Requirement 1:
Calculation of the present value of Criswell Acre’s note at a 10%
effective rate of interest:
Present value of $100,000 principal repayment in 5 years at 10%
$100,000 x .62092 = $62,092
Present value of five interest payments of $6,000
($100,000 x .06) each at 10%:
Requirement 2:
(a)
Interest
income—
10% of
column (d)
balance for
prior year
(b)
Cash
interest
received
(c)
Increase in
present
value of
note
(a)–(b)
(d)
End of year
present
value of
note
*Rounded
Requirement 3:
Requirement 4:
Calculation of the present value of Criswell Acre’s note at an 8%
effective rate of interest with 3 years until maturity:
Present value of $100,000 principal repayment in 3 years at 10%
Present value of three interest payments of $6,000
($100,000 x .06) each at 10%:
Total fair value of note at December 31, 2018 to be
P8-9. Recording cash discounts and sales returns (LO 8-1)
Note to instructor: This problem covers cash discount/credit terms
not discussed in the chapter and, thereby, provides an opportunity
to introduce these issues.
Requirement 1:
1/1/17:
To record sale of beer:
DR Cash discount 675
Note: The credit terms “3/10, n/30” means that the customer gets a
3% cash discount for payment made within 10 days. However, the
1/15/17:
To record return of beer from customers:
Note: This reflects the actual return of goods that was anticipated
earlier.
1/28/17:
To record receipt of payment:
Note: Recall that expected sales returns of $2,250 were recorded
on January 1, 2017. However, since the actual sales returns were
only $2,000, we reverse the 1/1/17 journal entry to the extent of
$250.
Requirement 2:
Journal entries prior to January 15, 2017 are unaffected.
1/15/17:
Note: This reflects the actual return of goods to the extent it was
anticipated earlier ($2,250). For goods returned in excess of
1/28/17:
To record receipt of payment:
Note: Balance due is $22,500 ($45,000 x 0.50) minus $3,000 of
Requirement 3:
1/1/17:
To record sale of beer:
1/9/17:
To record receipt of payment:
Note: The credit terms “3/10, n/30” mean that the customer gets a
3% cash discount for payment made within 10 days. However, the
1/15/17:
To record return of beer from the customers:
Note: Since expected sales returns were not recorded, actual
returns decrease net revenue by a debit to sales returns.
1/28/17:
To record receipt of payment:
sales returns. Since the payment was received after the 10th day,
Requirement 4:
Assuming the company uses the calendar year as its fiscal year, all
transactions pertaining to the sale of beer took place within one
accounting period (sale of goods, return of goods, and collection of
cash). However, if sales revenue is recorded in one accounting
period and actual sales returns are recorded in the following period,
then the matching principle is likely to be violated. This problem is
Requirement 5:
If the customer decides to take advantage of the cash discount, the
optimal time to do this is on the tenth day (i.e., the customer does
30th day. (Once again, the customer does not obtain any benefit by
paying any sooner.) Consequently, to take
Given that its incremental borrowing rate is 18%, the customer
could borrow $21,825 and pay interest for 20 days (i.e., $21,825 x
18% x 20/365 = $215)—i.e., it has to pay $22,040 ($21,825 + $215)
on the borrowing. However, if it had waited for the entire credit
Another way to answer the question is to view the cash discount
($675) as the return on investment in accounts receivable ($21,825)
P8-10. Balance sheet effects of collateralized borrowing (LO 8-6)
Requirement 1:
Required journal entries
August 1:
(($260,000 – 160,000) x .005)
September 30:
(($260,000 – 160,000 – 80,000) x .005)
Less:
Requirement 2:
August 31 balance sheet
Note to instructor: This amount comprises the initial balance of
of $500.
Requirement 3:
August
1:
August 31:
September 30:
(($260,000 – 160,000 – 80,000) x .005)
Note to instructor: Subsequent cash remittances from the factor
will reduce the due from factor balance. Any remaining balance in
P8-11. Factoring receivables (LO 8-6)
Requirement 1:
To record the sale of receivables to the factor:
Calculation of the proceeds from the factor
Since the factor is responsible for all the bad debts on the factored
receivables, the allowance for uncollectibles with respect to these
In essence, the loss on sale of receivables represents several
different income statement items. While there is loss of information
Note that the entire Interest expense has been recorded at the time
of sale as part of the loss amount. However, for long-term
Effect on statement of cash flows: The $176,000 received from the
factor will also show up as part of operating cash flows. Since the
An alternative approach is to separately show the three components
included in the loss on sale of receivables as follows:
The debit to the allowance for uncollectibles and the credit to the
bad debt provision represent the reversal of the journal entry for bad
debt provision on the $200,000 of the factored receivables. The
The loss on sale of receivables in the original journal entry is now
decomposed into two debits (to interest expense and factoring fee)
Requirement 2:
To record return of $3,000 of merchandise:
Requirement 3:
To record receipt of payment from the factor:
The actual bad debts incurred by the factor were $7,500.
Atherton will not record a journal entry to record this event. Recall
that the receivables were sold without recourse for bad debts, in
which case, the factor is responsible for all the bad debts. In the
given scenario, the actual bad debts of $7,500 were more than the