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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Interest-Bearing and Non-Interest-Bearing Notes On December 11, 2019, Hooper Inc. made a credit sale to Marshall Company and required Marshall to sign a $12,000,60-day note.

Required:

Prepare the journal entries necessary to record the receipt of the note by Hooper, the accrual of interest on December 31, 2019, and the customer’s repayment on February 9, 2020, assuming:

  1. 1. Interest of 12% was in addition to the face value of the note.
  2. 2. The note was issued as a $12,000 non-interest-bearing note with a present value of $11,765. The implicit interest rate on the note receivable was 12%. Assume a 360-day year. (Round to the nearest dollar.)

1.

To determine

Journalize the transactions to record the receipt of the note, if interest of 12% is assessed in addition to the face value of the note.

Explanation

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.

Accrued interest on notes receivable:

Accrued interest on notes receivable is interest revenue that is earned but not yet to be received and it is recorded for notes received during one period and due in the following period.

Prepare journal entries:

DateAccount Title and ExplanationDebitCredit
2019Notes Receivable$12,000 
      Sales revenue $12,000
 (To record the receipt of the interest bearing note)  

Table (1)

  • Notes receivable is an asset and it is increased. Therefore, debit notes receivable account by $12,000.
  • Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $12,000.
DateAccount Title and ExplanationDebitCredit
2019Interest Receivable$80 
      Interest income $80
 (To record the interest receivable and recognize the interest income)  

Table (2)

  • Interest receivable is an asset and it is increased. Therefore, debit notes receivable account by $80.
  • Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $80.
DateAccount Title and ExplanationDebitCredit
2020Cash$12,240 
      Interest receivable (1) $80
      Interest income (2) $160
       Notes receivable $12,000
 (To record the interest receivable and recognize the interest income)  

Table (3)

  • Cash is an asset and it is increased...

2.

To determine

Journalize the transactions to record the receipt of the note, if note is issued as a $12,000 non-interest bearing note with a present value if $11,765.

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