Chapter 7, Problem 1GLP

To determine

Journal:

It refers to the process of recording the data into books of accounts on continuous basis. It is a process of record keeping for every transaction by a company or a firm.

Ledger:

It refers to that financial book of accounting that classifies and summarizes all the data recorded in the journal.

Note receivable:

It refers to the amount that is to be received by a company from a third party on a promise to pay at any specified future date.

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

• Assets: Increase in asset should be debit and decrease should be credit.
• Liabilities: Increase in liabilities should be credit and decrease should be debit.
• Equity: Increase in Equity should be credit and decrease should be debit.
• Expense: Increase in expense should be debit and decrease should be credit.
• Revenue: Increase in revenue should be credit and decrease should be debit.

To prepare: Adjustment entries to record the given transactions for note receivables and compute .both the amount and timing of interest revenue for each note receivable.

Explanation of Solution

Accepted a $10,800, 60 day, 8% note dated this day in granting D.T a time extension on his part due account receivable:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 16	Note Receivable (D.T)		10,800
	Accounts Receivable (D.T)			10,800
	(Being receipt of note receivable by an account receivable is recorded )

Table(1)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.
• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Accrued interest on the D.T note:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Interest Receivable		36
	Interest Revenue			36
	(Being interest of one month on note receivable is recorded )

Table(2)

• Since, interest on notes receivable for one month will increase the value of interest receivable and interest receivable is an asset account, it is debited when it is increased.
• Since, interest for notes receivable will increase the amount of revenue and interest received is a revenue account, it is credited.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 15 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$10,800\times 8\%\times \frac{15}{365}\right]\\ =\$36\end{array}$

Payment received on the notes receivable:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 14	Cash		10,944
	Note Receivable (D.T.)			10,800
	…..Interest Revenue			108
	…..Interest Receivable			36
	(Being honor of note receivable is recorded )

Table(3)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account, it is debited when it is increased
• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account, it is credited when it is decreased.
• Interest on note receivable is revenue for the company so it is credited when it is increased.
• Since, the honor of note receivable by a customer will also reduce the amount for interest receivable and interest receivable is an asset account, it is credited when it is decreased.

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 45 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$10,800\times 8\%\times \frac{2\text{ months}}{12\text{ months}}\right]\\ =\$144\end{array}$

$\begin{array}{c}\text{Interest to be Recorded}=\text{Interest Revenue}-\text{Interest Already Recorded}\\ =\$144-\$36\\ =\$108\end{array}$

Accepted a $6,100, 8%, 90 day note dated this day in granting a time extension on the past due account receivable from M.Co:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar 2	Note Receivable (M.Co)		6,100
	Accounts Receivable (M.Co)			6,100
	(Being receipt of note receivable by an account receivable is recorded )

Table(4)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.
• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Mar 17 accepted a $2,400, 30 day, 7% note dated this day in granting A.P a time extension on the past due account receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar 17	Note Receivable (A.P)		2,400
	Accounts Receivable (A.P)			2,400
	(Being receipt of note receivable by an account receivable is recorded )

Table(5)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.
• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Notes receivable dishonored when presented for payment:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Apr 16	Accounts Receivable (A.P)		2,414
	Note Receivable (A.P)			2,400
	…..Interest Revenue			14
	(Being receipt of note receivable by an account receivable is recorded )

Table(6)

• Account receivable will again be due, so a reverse for previous entry should be made which will increase the value of accounts receivable and since it is an asset account, it is debited when it is increased.
• Dishonored of note will decrease the value of note receivable and since it is an asset account, it is credited when it is decreased.
• Dishonored of note will also include the amount of interest that is to be received on note, so the interest amount will also be considered to be recorded and since it is revenue account, it is credited when it is increased.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $2,400 for principle amount of notes, 7% for annual rate of interest and 30 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$2,400\times 7\%\times \frac{30}{365}\right]\\ =\$14\end{array}$

M.Co refused to pay the note that due on May 31:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Accounts Receivable (M.Co)		6,222
	Note Receivable (M.Co)			6,100
	…..Interest Revenue			122
	(Being receipt of note receivable by an account receivable is recorded )

Table(7)

• Account receivable will again be due, so a reverse for previous entry should be made which will increase the value of accounts receivable and since it is an asset account, it is debited when it is increased.
• Dishonored of note will decrease he value of note receivable and since it is an asset account, it is credited when it is decreased.
• Dishonored of note will also include the amount of interest that is to be received on note, so the interest amount will also be considered to be recorded and since it is revenue account, it is credited when it is increased.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $6,100 for principle amount of notes, 8% for annual rate of interest and 90 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$6,100\times 8\%\times \frac{90}{365}\right]\\ =\$122\end{array}$

Jul 16 received payment from M.Co for the maturity value of its dishonored note plus interest for 46 days beyond maturity at 8%.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jul 16	Cash		6,286
	Accounts Receivable (M.L)			6,222
	…..Interest Revenue			63
	(Being honor of note receivable is recorded )

Table(8)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account, it is debited when it is increased.
• Since, the honor of note receivable by a customer will decrease the amount of account receivable and account receivable is an asset account, it is credited when it is decreased.
• Interest on note receivable is revenue for the company so it is credited when it is increased.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $6,222 for principle amount of notes, 8% for annual rate of interest and 46 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$6,222\times 8\%\times \frac{46}{365}\right]\\ =\$63\end{array}$

Accepted a $7,450, 90 day, 10% note dated this day in granting a time extension on the past due account receivable of M:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 7	Note Receivable (M)		7,450
	Accounts Receivable (M)			7,450
	(Being receipt of note receivable by an account receivable is recorded )

Table(9)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.
• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Accepted a $2,100, 60 day, 10% note dated this dated this day in granting N.C a time extension on his past due account receivable:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Sep 3	Note Receivable (N.C)		2,100
	Accounts Receivable (N.C)			2,100
	(Being receipt of note receivable by an account receivable is recorded )

Table(10)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.
• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Received payment of principal plus interest from N.C for the September Note:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov 2	Cash		2,135
	Note Receivable (N.C)			2,100
	…..Interest Revenue			35
	(Being honor of note receivable is recorded )

Table(11)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account, it is debited when it is increased.
• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account, it is credited when it is decreased.
• Interest on note receivable is revenue for the company so it is credited when it is increased.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $2,100 for principle amount of notes, 10% for annual rate of interest and 60 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$2,100\times 10\%\times \frac{60}{365}\right]\\ =\$35\end{array}$

Received payment of principal plus interest from M for the August 7 note:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov 5	Cash		7,636
	Note Receivable (M)			7,450
	…..Interest Revenue			184
	(Being honor of note receivable is recorded )

Table(12)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account, it is debited when it is increased.
• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account, it is credited when it is decreased.
• Interest on note receivable is revenue for the company so it is credited when it is increased.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $7,450 for principle amount of notes, 10% for annual rate of interest and 90 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$7,450\times 10\%\times \frac{90}{365}\right]\\ =\$184\end{array}$

Wrote off the allowance for doubtful accounts:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 1	Allowance for Doubtful Account		2,414
	Accounts Receivable (A.P)			2,414
	(Being write off of uncollectible accounts receivable is recorded)

Table(13)

• Allowance for doubtful account is a contra asset account, it is debited when decreased.
• Since, in allowance method of accounting for accounts receivable the deduction is made against the account receivable account which is an asset account, it is credited when it s decreased.

Computation of amount of interest revenue for note accepted on Dec 16.

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 60 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$10,800\times 8\%\times \frac{60}{365}\right]\\ =\$142\end{array}$

Computation of timing of interest revenue for note accepted on Dec 16.

Particulars	Number of days
Number of Days Remaining in December	15
Number of Days in January	31
Number of Days in February	14
Total	60

Thus, the amount of interest revenue is $142 and timing for interest revenue is Feb 14 for note accepted on Dec 16.

Computation of amount of interest revenue for note accepted on Mar 2.

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $6,100 for principle amount of notes, 8% for annual rate of interest and 136 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$6,100\times 8\%\times \frac{136}{365}\right]\\ =\$182\end{array}$

Computation of timing of interest revenue for note accepted on Mar 2.

Particulars	Number of days
Number of Days Remaining in March	29
Number of Days in April	30
Number of Days in May	31
Number of Days in June	30
Number of Days in July	16
Total	136

Thus, the amount of interest revenue is $184 and timing for interest revenue is July 16 for note accepted on Mar 2.

Computation of amount of interest revenue for note accepted on Mar 17

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $2,400 for principle amount of notes, 7% for annual rate of interest and 30 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$2,400\times 7\%\times \frac{30}{365}\right]\\ =\$14\end{array}$

Computation of timing of interest revenue for note accepted on Mar 17

Particulars	Number of days
Number of Days Remaining in March	14
Number of Days in April	16
Total	30

Thus, the amount of interest revenue is $14 and timing for interest revenue is Apr 16 for note accepted on Mar 17.

Computation of amount of interest revenue for note accepted on Aug 7.

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $7,450 for principle amount of notes, 10% for annual rate of interest and 90 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$7,450\times 10\%\times \frac{90}{365}\right]\\ =\$184\end{array}$

Computation of timing of interest revenue for note accepted on Aug 7.

Particulars	Number of days
Number of Days Remaining in August	24
Number of Days in September	30
Number of Days in October	31
Number of Days in November	5
Total	90

Thus, the amount of interest revenue is $184 and timing for interest revenue is Nov 5 for note accepted on Aug 7.

Computation of amount of interest revenue for note accepted on Sep 3.

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $2,100 for principle amount of notes, 10% for annual rate of interest and 60 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$2,100\times 10\%\times \frac{60}{365}\right]\\ =\$35\end{array}$

Computation of timing of interest revenue for note accepted on Sep 3.

Particulars	Number of days
Number of Days Remaining in September	27
Number of Days in October	31
Number of Days in November	2
Total	60

Thus, the amount of interest revenue is $35 and timing for interest revenue is Nov 2 for note accepted on Sep 3.