Chapter 8, Problem 8.3PB

Recording Notes Receivable Transactions

Stinson Company recently agreed to loan an employee $100,000 for the purchase of a new house. The loan was executed on May 31, 2015, and is a one-year, 6 percent note, with interest payments required on November 30, 2015, and May 31, 2016. Stinson issues quarterly financial statements on March 31, June 30, September 30, and December 31.

Required:

1. 1. Prepare the journal entry that Stinson will make when the note is established.
2. 2. Prepare the journal entries that Stinson will make to record the interest accruals at each quarter end and interest payments at each payment date.
3. 3. Prepare the journal entry that Stinson will make to record the principal payment at the maturity date.

To determine

To prepare: The journal entry in the books of Company S to record the promissory note received on May 31, 2015.

Explanation of Solution

Note Receivable:

Note receivable refers to a written promise by the debtor for the amounts to be received within a stipulated period of 60-90 days or longer time. This written promise is issued by a debtor or, a borrower to the lender or, creditor. Notes receivable is an asset of a business.

Prepare journal entry in the books of Company S to record the promissory note received on May 31, 2015.

Date	Account Title and Explanation	Debit ($)	Credit ($)
May 31, 2015	Notes receivable	100,000
	Cash		100,000
	(To record the acceptance of the note receivable)

Table (1)

• Note Receivable is an asset account, and acceptance of note has increased the value of the asset, so debit it.
• Cash is an asset account, and it has decreased the value of the asset, so credit it.

To determine

To prepare: The journal entry in the books of Company S to record the interest accruals at the end of each quarter and the interest received at the each payment date.

Explanation of Solution

Entry to record the interest accruals at the end of quarter June 30:

Date	Account Title and Explanation	Debit ($)	Credit ($)
June 30, 2015	Interest Receivable (1)	500
	Interest Revenue		500
	(To record accrued interest revenue)

Table (2)

Working Notes:

Calculate the amount of interest revenue earned on note, as on June 30, 2015.

$\begin{array}{c}\text{Interest Receivable = }\left[\begin{array}{c}\text{Notes Receivable}\times \text{ Interest Percentage}\times \\ \left(\frac{\text{June}\text{1, 2015 to June 30, 2015}}{12\text{ months}}\right)\end{array}\right]\\ \text{= \$100,000}\times 6\text{\%}\times \frac{\text{1months}}{12\text{ months}}\\ =\text{\$500}\end{array}$ (1)

• Interest receivable is an asset and it increases the value of the asset, so debit interest receivableaccount.
• Interest revenue is a component of stockholder’s equity and it is increased, which in turn has increased the stockholder’s equity, so credit interest revenue account.

Entry to record the interest accruals at the end of quarter September 30:

Date	Account Title and Explanation	Debit ($)	Credit ($)
September 30, 2015	Interest Receivable (2)	1,500
	Interest Revenue		1,500
	(To record accrued interest revenue)

Table (3)

Working Notes:

Calculate the amount of interest revenue earned on note, as on September 30, 2015.

$\begin{array}{c}\text{Interest Receivable = }\left[\begin{array}{c}\text{Notes Receivable}\times \text{ Interest Percentage}\times \\ \left(\frac{\text{July 1, 2015 to September 30, 2015}}{12\text{ months}}\right)\end{array}\right]\\ \text{= \$100,000}\times 6\text{\%}\times \frac{\text{3months}}{12}\\ =\text{\$1,500}\end{array}$ (2)

• Interest receivable is an asset and it increases the value of the asset, so debit interest receivableaccount.
• Interest revenue is a component of stockholder’s equity and it is increased, which in turn has increased the stockholder’s equity, so credit interest revenue account.

Entry to record the interest payment received on November 30, 2015.

Date	Account Title and Explanation	Debit ($)	Credit ($)
November 30, 2015	Cash	3,000
	Interest Receivable (1) + (2)		2,000
	Interest Revenue (3)		1,000
	(To record collection of interest)

Table (4)

Working Notes:

Calculate the amount of interest revenue earned on note, from October 1 to November 30.

$\begin{array}{c}\text{Interest Revenue = }\left[\begin{array}{c}\text{Notes Receivable}\times \text{ Interest Percentage}\times \\ \left(\frac{\text{October 1, 2015 to November 30, 2015}}{12\text{ months}}\right)\end{array}\right]\\ \text{= \$100,000}\times 6\text{\%}\times \frac{\text{2}\text{months}}{12\text{ months}}\\ =\text{\$1,000}\end{array}$ (3)

Collection of interest on note to be recorded by increasing cash, eliminating interest receivable, and recording interest revenue.

• An increase in cash (asset account) is debited with $3,000,
• A decrease in interest receivable (asset account) is credited with (1)+(2) $\left(\$500+\$1,500\right)$$2,000 and
• An increase in interest revenue (stockholders’ equity account) is credited with (3) $1,000.

Entry to record the interest accruals at the end of quarter (December 31, 2015):

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2015	Interest Receivable (4)	500
	Interest Revenue		500
	(To record accrued interest revenue)

Table (5)

Working Notes:

Calculate the amount of interest revenue earned on note, as on December 31, 2015.

$\begin{array}{c}\text{Interest Receivable = }\left[\begin{array}{c}\text{Notes Receivable}\times \text{ Interest Percentage}\times \\ \left(\frac{\text{December 1, 2015 to December 31, 2015}}{12\text{ months}}\right)\end{array}\right]\\ \text{= \$100,000}\times 6\text{\%}\times \frac{1\text{months}}{12}\\ =\text{\$500}\end{array}$ (4)

• Interest receivable is an asset and it increases the value of the asset, so debit interest receivableaccount.
• Interest revenue is a component of stockholder’s equity and it is increased, which in turn has increased the stockholder’s equity, so credit interest revenue account.

Entry to record the interest accruals at the end of quarter (March 31, 2016):

Date	Account Title and Explanation	Debit ($)	Credit ($)
March 31, 2016	Interest Receivable (5)	1,500
	Interest Revenue		1,500
	(To record accrued interest revenue)

Table (6)

Working Notes:

Calculate the amount of interest revenue earned on note, as on March 31, 2016.

$\begin{array}{c}\text{Interest Receivable = }\left[\begin{array}{c}\text{Notes Receivable}\times \text{ Interest Percentage}\times \\ \left(\frac{\text{January 1, 2016 to March 31, 2016}}{12\text{ months}}\right)\end{array}\right]\\ \text{= \$100,000}\times \text{6\%}\times \frac{\text{3months}}{12}\\ =\text{\$1,500}\end{array}$ (5)

• Interest receivable is an asset and it increases the value of the asset, so debit interest receivableaccount.
• Interest revenue is a component of stockholder’s equity and it is increased, which in turn has increased the stockholder’s equity, so credit interest revenue account.

Entry to record the interest payment received on May 31, 2016.

Date	Account Title and Explanation	Debit ($)	Credit ($)
May 31, 2016	Cash	3,000
	Interest Receivable (4) + (5)		2,000
	Interest Revenue (6)		1,000
	(To record collection of interest)

Table (7)

Working Notes:

Calculate the amount of interest revenue earned on note, from April 1 to May 31, 2016.

$\begin{array}{c}\text{Interest Revenue = }\left[\begin{array}{c}\text{Notes Receivable}\times \text{ Interest Percentage}\times \\ \left(\frac{\text{April 1, 2016 to May 31, 2016}}{12\text{ months}}\right)\end{array}\right]\\ \text{= \$100,000}\times 6\text{\%}\times \frac{\text{2}\text{months}}{12\text{ months}}\\ =\text{\$1,000}\end{array}$ (6)

Collection of interest on note to be recorded by increasing cash, eliminating interest receivable, and recording interest revenue.

• An increase in cash (asset account) is debited with $3,000,
• A decrease in interest receivable (asset account) is credited with (4)+(5) $\left(\$500+\$1,500\right)$$2,000 and
• An increase in interest revenue (stockholders’ equity account) is credited with (6) $1,000.

To determine

To prepare: The journal entry in the books of Company S to record the collection of principal on note at maturity.

Explanation of Solution

Record the collection of principal on the note at maturity.

Date	Account Title and Explanation	Debit ($)	Credit ($)
May 31, 2016	Cash	100,000
	Notes Receivable		100,000
	(To record the collection of principal on note)

Table (8)

Collection of principal must be recorded by increasing cash and eliminating notes receivable account by $100,000. Hence,

• An increase in cash (asset account) is debited with $100,000, and
• A decrease in notes receivable (asset account) is credited with $100,000.