Question

Evergreen Company sells lawn and garden products to wholesalers. The company's fiscal year-end is December 31. During 2021, the following transactions related to receivables occurred:

Feb.		28		Sold merchandise to Lennox, Inc., for $40,000 and accepted a 12%, 7-month note. 12% is an appropriate rate for this type of note.
Mar.		31		Sold merchandise to Maddox Co. that had a fair value of $24,640, and accepted a noninterest-bearing note for which $28,000 payment is due on March 31, 2022.
Apr.		3		Sold merchandise to Carr Co. for $20,000 with terms 2/10, n/30. Evergreen uses the gross method to account for cash discounts.
		11		Collected the entire amount due from Carr Co.
		17		A customer returned merchandise costing $3,800. Evergreen reduced the customer’s receivable balance by $5,600, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
		30		Transferred receivables of $56,000 to a factor without recourse. The factor charged Evergreen a 1% finance charge on the receivables transferred. The sale criteria are met.
June		30		Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 14%. The note was discounted without recourse.
Sep.		30		Lennox, Inc., paid the note amount plus interest to the bank.

Required:
1. Prepare the necessary journal entries for Evergreen for each of the above dates. For transactions involving the sale of merchandise, ignore the entry for the cost of goods sold.
2. Prepare any necessary adjusting entries at December 31, 2021. Adjusting entries are only recorded at year-end.
3. Prepare a schedule showing the effect of the journal entries on 2021 income before taxes.

For #3	Income
Date	increase (decrease)
Feb. 28
March 31
April 3
April 11
April 17
April 17
April 30
June 30
June 30
December 31
total effect	$

Answer 1

1
28-Feb	Note Receivable	$   40,000.00
	Sales		$        40,000.00
31-Mar	Note receivable	$   28,000.00
	sales		$        28,000.00
3-Apr	Accounts receivable	$   20,000.00
	Sales		$        20,000.00
11-Apr	cash	$   19,600.00		=20000*98%
	sales discount	$        400.00		=20000*2%
	accounts receivable		$        20,000.00
17-Apr	Sales return and allowances	$     5,600.00
	accounts receivable		$          5,600.00
	Merchandise Inventory	$     3,800.00
	Cost of goods sold		$          3,800.00
30-Apr	cash	$   55,440.00		(56000*99%
	loss on sale of receivable	$        560.00		(56000*1%)
	accounts receivable		$        56,000.00
30-Jun	Interest Receivable	$     1,600.00		(40000*12%*4/12)
	Interest revenue		$          1,600.00
30-Jun	cash	$   41,302.00
	loss on sale of note receivable	$        298.00
	interest receivable		$          1,600.00
	note receivable		$        40,000.00
	Face value	$   40,000.00
	Interest	$     2,800.00		(40000*12%*7/12)
	Maturity value	$   42,800.00
	discount	$     1,498.00		(42800*14%*3/12)
	Cash	$   41,302.00
2	Adjusting entry
	No Adjusting Entry required
3	Schedule
		28-Feb	$        40,000.00
		31-Mar	$        28,000.00
		3-Apr	$        20,000.00
		11-Apr	$           (400.00)
		17-Apr	$        (5,600.00)
		17-Apr	$        (3,800.00)
		30-Apr	$           (560.00)
		30-Jun	$          1,600.00
		30-Jun	$           (298.00)
		31-Dec	$                     -
		total	$        78,942.00