Chapter 5, Problem 8PB

1.

To determine

Prepare the acceptance of the note on April 15, 2021.

Explanation of Solution

Note receivable:

Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.

Journal entry for the acceptance of the note on April 15, 2021:

Date	Account Title and Explanation		Debit($)	Credit($)
April 15, 2021	Notes receivable (1)		110,000
		Service revenue		110,000
	(To record the services provided  and acceptance of note)

Table (1)

• Notes receivable is an asset and increased it. So, debit notes receivable account with $110,000.
• Service revenue is a component of stock holders’ equity and increased it. So credit service revenue with $110,000.

2.

To determine

Record the interest collected on April 15 for 2022 and 2023 and the adjustment for interest revenue on December 31, 2021, 2022 and 2023.

Explanation of Solution

Interest receivables:

Interest receivables, are non-trade receivables as these are not resulted from sales transaction or business operations.

Note receivable:

Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.

Journal entry for adjustment of interest receivable:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2021	Interest receivable (1)		9,350
		Interest revenue		9,350
	(To record adjustment for accrued interest)

Table (2)

Journal entry for receipt of annual interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
April 15, 2022	Cash		13,200
		Interest receivable (1)		9,350
		Interest revenue (2)		3,850
	(To record receipt of annual interest)

Table (3)

 Journal entry for adjustment for accrued interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2022	Interest receivable (1)		9,350
		Interest revenue		9,350
	(To record adjustment for accrued interest)

Table (4)

Journal entry for receipt of annual interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
April 15, 2023	Cash		13,200
		Interest receivable (1)		9,350
		Interest revenue (2)		3,850
	(To record receipt of annual interest)

Table (5)

 Journal entry for adjustment for accrues interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2023	Interest receivable (1)		9,350
		Interest revenue		9,350
	(To record adjustment for accrued interest)

Table (6)

For Adjustment of interest receivable on December 31, 2021:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

Working notes:

Calculate interest revenue for 8.5 months.

$\begin{array}{c}\text{ Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$110,000\times 12\%\times \frac{8.5}{12}\\ =\$9,350\end{array}$

(1)

For receiving of annual interest on April 15, 2022:

• Cash is an asset and it increases. Hence debit the cash account.
• Interest receivable is an asset and it decreases. Hence credit the interest receivable account.
• Interest revenue is a component of stockholders’ equity and it increases. Hence credit the interest revenue account.

Working notes:

Calculate the amount of interest revenue for 3.5 months.

$\begin{array}{c}\text{Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$110,000\times 12\%\times \frac{3.5}{12}\\ =\$3,850\end{array}$

(2)

For adjustment of interest receivable on December 31, 2022:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

For receiving of annual interest on April 15, 2023:

• Cash is an asset and it increases. Hence debit the cash account.
• Interest receivable is an asset and it decreases. Hence credit the interest receivable account.
• Interest revenue is a component of stockholders’ equity and it increases. Hence credit the interest revenue account.

For adjustment of interest receivable on December 31, 2023:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

3.

To determine

Record the cash collection on April 15, 2024:

Explanation of Solution

Journal entry for cash collection on April 15, 2024:

Date	Account Title and Explanation		Debit ($)	Credit ($)
April 15, 2024	Cash		123,200
		Notes receivable		110,000
		Interest receivable (1)		9,350
		Interest revenue (2)		3,850
	(To record cash collection of the note and interest)

Table (7)

For receiving of annual interest on April 15, 2024:

• Cash is an asset and it increases. Hence debit the cash account.
• Notes receivable is an asset and it decreases. Hence credit the notes receivable account.
• Interest receivable is an asset and it decreases. Hence credit the interest receivable account.
• Interest revenue is a component of stockholders’ equity and it increases. Hence credit the interest revenue account.