Logo Limited follows ASPE. It manufactures sweatshirts for sale to athletic-wear retailers. The following summary information was

Question:

Logo Limited follows ASPE. It manufactures sweatshirts for sale to athletic-wear retailers. The following summary information was available for Logo for the year ended December 31, 2016:

Cash .............................................. $20,000

Accounts receivable ............................. 40,000

Inventory ......................................... 85,000

Accounts payable ............................... 65,000

Accrued liabilities ............................... 15,000

Part 1

During 2017, Logo had the following transactions:

1. Total sales were $465,000. Of the total sales amount, $215,000 was on a credit basis.

2. On June 30, a $50,000 account receivable of a major customer was settled, with Logo accepting a $50,000, one-year, 11% note, with the interest payable at maturity.

3. Logo collected $160,000 on accounts receivable during the year.

4. At December 31, 2017, Cash had a balance of $15,000, Inventory had a balance of $80,000, Accounts Payable was $70,000, and Accrued Liabilities was $16,000.

Instructions

(a) Prepare summary journal entries to record the items noted above.

(b) Calculate the current ratio and the receivables turnover ratio for Logo at December 31, 2017. Use these measures to assess Logo's liquidity. The receivables turnover ratio last year was 4.75.

Part 2

Now assume that at year end 2017, Logo enters into the following transactions related to the company's receivables:

1. Logo sells the note receivable to Prairie Bank for $50,000 cash plus accrued interest. Given the creditworthiness of Logo's customer, the bank accepts the note without recourse and assesses a finance charge of 3.5%. Prairie Bank will collect the note directly from the customer.

2. Logo factors some accounts receivable at the end of the year. Accounts totalling $40,000 are transferred to Primary Factors, Inc., with recourse. Primary Factors retains 6% of the balances and assesses a finance charge of 4% on the transfer. Primary Factors will collect the receivables from Logo's customers. The fair value of the recourse obligation is $4,000.

Instructions

(d) Prepare the journal entry to record the sale of receivables to Primary Factors.

(e) Calculate the current ratio and the receivables turnover ratio for Logo at December 31, 2017. Use these measures to assess Logo's liquidity. The receivables turnover ratio last year was 4.75.

(f) Discuss how the ratio analysis in part (e) would be affected if Logo had transferred the receivables in secured borrowing transactions.

(g) From Prairie Bank's perspective, what is the total effect on its net income as a result of purchasing the note receivable without recourse?

(h) From Primary Factors' perspective, what is the total effect on its net income as a result of purchasing the accounts receivable with recourse?

Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...