   Chapter 17, Problem 5SEB

Chapter
Section
Textbook Problem

JOURNAL ENTRIES (NOTE RECEIVED, DISCOUNTED, DISHONORED, AND COLLECTED) Prepare general journal entries for the following transactions: To determine

Prepare the journal entries to record the following transactions.

Explanation

Notes receivable:

Notes Receivable is a written promise to receive a certain amount on a future date, with certain percentage of interest. Companies use to issue notes receivable to meet short-term financing needs.

Prepare journal entry to record received 120-days, 7% note in payment for accounts receivable balance of $3,000.  Date Account titles and Explanation Debit Credit August 4 Notes receivable$4,000 Accounts receivable $4,000 (To record received note to settle account) Table (1) • Notes receivable is a current asset, and it is increased. Therefore, debit notes receivable account for$4,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $4,000. Prepare journal entry to record discounted the note at a rate of 8%.  Date Account titles and Explanation Debit Credit August 14 Cash$3,993.27 Interest expense (1) $6.73 Notes receivable (2)$4,000 (To record received payment of note with interest)

Table (2)

Working notes:

(1)Calculate cash proceeds.

Cash proceeds =Maturity value Discount amount (Difference in time period)=($4,000+($4,000×7%×120360))($4,093.33×8%×110360)=$4,093.33$100.06=$3,993.27

(2)Calculate interest revenue.

Interest expense =Maturity valueCash proceeds= $4,093.33$3,993.27=$6.73 • Cash is a current asset, and it is increased. Therefore, debit cash account for$3,993.27.
• Notes receivable is a current asset, and it is decreased. Therefore, credit notes receivable account for $4,000. • Interest expense is a component of stockholders’ equity, and it increases the expemse accounts. Therefore, debit interest expense account for$6.73.

Prepare journal entry to record received a 30-day, 6% note in payment for accounts receivable balance of $900.  Date Account titles and Explanation Debit Credit September 5 Notes receivable$1,200 Accounts receivable $1,200 (To record received note to settle account) Table (3) • Notes receivable is a current asset, and it is increased. Therefore, debit notes receivable account for$1,200.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,200. Prepare journal entry to record 30 day, 7% note is dishonored.  Date Account titles and Explanation Debit Credit October 5 Accounts receivable$1,206 Notes receivable $1,200 Interest revenue (3)$6 (To record notes receivable dishonored)

Table (4)

Working note:

(3)Calculate interest revenue

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