Evergreen Company sells lawn and garden products to wholesalers. The company’s fiscal year-end is Dec. 31. During 2006, the following transactions related to receivables occurred:
Feb.28 Sold merchandise to Lennox, Inc. for $10,000 and accepted a 10%, 7-month note. 10% is an appropriate rate for this type of note.
Mar. 31 Sold merchandise to Maddox Co. and accepted a noninterest-bearing note with a discount rate of 10%. The $8,000 payment is due on March 31, 2007.
Apr. 3 Sold merchandise to Carr Co. for $7,000 with terms 2/10, n/30. Evergreen uses the gross method to account for cash discounts.
Apr 11 Collected the entire amount due from Carr Co.
Apr 17 A customer returned merchandise costing $3,200. Evergreen reduced the customer’s receivable balance by $5,000, the sales price of the merchandise. Sales returns are recorded by the company as thet occur.
Apr 30 Transferred receivables of $50,000 to a factor without recourse. The factor changed Evergreen a 1% finance charge on the receivables transferred. The sale criteria are met.
Jun 30 Discounted the Lennox, Inc. note at the bank. The bank’s discount rate is 12%. The note was discounted without recourse.
Aug 31 Lennox, Inc. paid the note amount plus interest to the bank.
1. Prepare the necessary journal entries for Evergreen for the cash of the above dates. For all transactions involving the sale of merchandise, ignore the entry for the cost of goods sold (round all calculations to the nearest dollar).
2. Prepare any necessary adjusting entries at Dec. 31, 2006. Adjusting entries are only recorded at year-end (round all calculations to the nearest dollar).
3. Prepare a schedule showing the effect of the journal entries in requirements 1 and 2 on 2006 income before taxes.