Chapter 7, Problem 5AP

1.

To determine

Prepare journal entries to record the transactions and events.

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

Interest on note:

Interest on note is the amount charged on the principal value of note, for the privilege of borrowing money. Interest is to be paid by the borrower, and to be received by the lender.

Dishonor of notes receivable:

When the maker of the note, fails to pay the note in full, to the payee on the due date, then it is referred to as the dishonor of the notes receivable.

If the payee expects the collection of the notes receivable in the future, then the amount of principal and interest on the note will be debited to the accounts receivable. On the other hand, if the payee has no hope on the collection of the note in the future, then the face value of the note will be debited to the allowance for doubtful accounts.

Prepare journal entries to record the transactions and events.

Date	Account Title and Explanation	Debit ($)	Credit ($)
2014
December 16	Notes receivable – Person DT	10,800
	Accounts receivable – Person DT		10,800
	(To record the acceptance of note from Person DT for balance due)
December 31	Interest receivable	36
	Interest revenue            $\left(\$10,800\times 8\%\times 15\text{ days}/360\text{days}\right)$		36
	(To record the accrued interest revenue)
2015
February 14	Cash	10,944
	Notes receivable –­­ Person DT		10,800
	Interest receivable		36
	Interest revenue     $\left(\$10,800\times 8\%\times 45\text{ days}/360\text{days}\right)$		108
	(To record the collection of cash on note in full)
March 2	Notes receivable – Company M	6,100
	Accounts receivable – Company M		6,100
	(To record the acceptance of note from Company M for balance due)
March 17	Notes receivable – Person A	2,400
	Accounts receivable – Person A		2,400
	(To record the acceptance of note from Person A for balance due)
April 16	Accounts receivable – Person A	2,414
	Interest revenue       $\left(\$2,400\times 7\%\times 30\text{ days}/360\text{days}\right)$		14
	Notes receivable – Person A		2,400
	(To record the dishonor of Person A’s note)
May 31	Accounts receivable – Company M	6,222
	Interest revenue       $\left(\$6,100\times 8\%\times 90\text{ days}/360\text{days}\right)$		122
	Notes receivable – Company M		6,100
	(To record the dishonor of Company M’s note)
July 16	Cash	6,286
	Accounts receivable – Company M		6,222
	Interest revenue     $\left(\$6,222\times 8\%\times 46\text{ days}/360\text{days}\right)$		64
	(To record the collection of account along with interest)
August 7	Notes receivable – Company MU	7,450
	Accounts receivable – Company MU		7,450
	(To record the acceptance of note from Company MU for balance due)
September 3	Notes receivable – Person NC	2,100
	Accounts receivable – Person NC		2,100
	(To record the acceptance of note from Person NC for balance due)
November 2	Cash	2,135
	Notes receivable – Person NC		2,100
	Interest revenue     $\left(\$2,100\times 10\%\times 60\text{ days}/360\text{days}\right)$		35
	(To record the collection of cash on note in full)
November 5	Cash	7,636
	Notes receivable – Person MU		7,450
	Interest revenue     $\left(\$7,450\times 10\%\times 90\text{ days}/360\text{days}\right)$		186
	(To record the collection of cash on note in full)
December 1	Allowance for doubtful accounts	2,414
	Accounts receivable – Person A		2,414
	(To record the write-off)

2.

To determine

Describe how a business has to report the pledged receivables as security for a loan and loan is still outstanding at the end of the period.

Explanation of Solution

The business must disclose the value of receivables was pledged as security for loan, and the term period in the notes to its financial statements. Business has secured a specific portion of the loan using the assets as collateral. Thus, it is required to be disclosed in the annual report as per full-disclosure principle, in case the business dishonors its obligations under the loan, the creditors can claim the amount of receivables identified in the pledge as collateral to cover the loan.