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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Notes Receivable Transactions The following notes receivable transactions occurred for Harris Company during the last three months of the current year. (Assume all notes are dated the day the transaction occurred.)

Chapter 6, Problem 13P, Notes Receivable Transactions The following notes receivable transactions occurred for Harris , example  1

Chapter 6, Problem 13P, Notes Receivable Transactions The following notes receivable transactions occurred for Harris , example  2

Required:

  1. 1. Prepare the journal entries to record the preceding note transactions and the necessary adjusting entries on December 31. (Assume that Harris does not normally sell its notes and uses a 360-day year for the purpose of computing interest. Round all calculations to the nearest penny.)
  2. 2. Show how Harris’ notes receivable would be disclosed on the December 31 balance sheet. (Assume these are the only note transactions encountered by Harris during the year.)

1.

To determine

Record journal entries for previous note transactions and prepare the adjusting entries.

Explanation

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 the lender or creditor. Notes receivable is an asset of a business.

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

DateAccount Title and ExplanationDebitCredit
December 1Notes receivable$9,000 
      Accounts receivable $9,000
 (To record the notes receivable)  

Table (1)

  • Notes receivable is an asset and it is increased. Therefore, debit notes receivable account by $9,000.
  • Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account by $9,000.
DateAccount Title and ExplanationDebitCredit
December 8Recourse liability$1,230 
      Gain from sale of notes $1,230
 (To record the fair value of recourse liability)  

Table (2)

  • Recourse liability is a liability and it is decreased. Therefore, debit recourse liability account by $1,230.
  • Gain from sale of notes is a component of stockholders’ equity and it is increased. Therefore, credit gain from sale of notes account by $1,230.
DateAccount Title and ExplanationDebitCredit
December 10Cash (1)$5,995.39 
 Loss from sale of receivable (1)$41.28 
      Notes receivable $6,000
      Interest income (5) $36.67
 (To record note discounted on November 20 )  

Table (3)

  • Cash is an asset and it is increased. Therefore, debit cash account by $5,995.39
  • Loss from sale of receivable is a component of stockholders’ equity and it is decreased. Therefore, debit loss from sale of receivables by $41.28
  • Notes receivable is an asset and it is increased. Therefore, credit notes receivable account by $6,000.
  • Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $36.67.
DateAccount Title and ExplanationDebitCredit
December 31Interest receivable$217.50 
      Interest income(6) $217.50
 (To record the interest income of note)  

Table (4)

  • Interest receivable is an asset and it is increased. Therefore, debit interest receivable account by $217.50.
  • Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $217.50.

Working note:

(1) Calculate the amount of loss from receivable:

ParticularsAmount ($)
Face value of the note6,000
Interest to maturity (2)220
Maturity value of note6,220
Less: Discount (3)($224.61)
Proceeds5,995.39
Less: Book value of note (4)(6,036.67)
Loss from sale of receivable41.28

Table (5)

(2) Calculate the interest to maturity:

Interesttomaturity=(NotereceivableonNovember20×Percentageofinterest×Timeperiod)=$6,000×11%×120days360days=$660×120days360days=$220

(3) Calculate the amount of discount:

Discount=(Maturityvalueofnote×percentageofinterest×Timeperiod)=$6,220×13%×(12020360days)=$808

2.

To determine

State the manner in which the notes receivable of Company H will be disclosed on the balance sheet on December 31.

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