Chapter 9, Problem 9.6APR

Sales and notes receivable transactions

The following were selected from among the transactions completed by Caldemeyer Co. during the current year. Caldemeyer Co. sells and installs home and business security systems.

Jan. 3.	Loaned $18,000 cash to Trina Gelhaus, receiving a 90-day, 8% note.
Feb. 10.	Sold merchandise on account to Bradford & Co., $24,000. The cost of the merchandise sold was $14,400.
13.	Sold merchandise on account to Dry Creek Co., $60,000. The cost of merchandise sold was $54,000.
Mar. 12.	Accepted a 60-day, 7% note for $24,000 from Bradford & Co. on account.
14.	Accepted a 60-day, 9% note for $60,000 from Dry Creek Co. on account.
Apr. 3.	Received the interest due from Trina Gelhaus and a new 120-day, 9% note as a renewal of the loan of January 3. (Record both the debit and the credit to the notes receivable account.)
May 11.	Received from Bradford & Co. the amount due on the note of March 12.
13.	Dry Creek Co. dishonored its note dated March 14.
July 12.	Received from Dry Creek Co. the amount owed on the dishonored note, plus interest for 60 days at 12% computed on the maturity value of the note.
Aug. 1.	Received from Trina Gelhaus the amount due on her note of April 3.
Oct. 5.	Sold merchandise on account to Halloran Co., $13,500. The cost of the merchandise sold was $8,100.
15.	Received from Halloran Co. the amount of the invoice of October 5.

Instructions

Journalize the entries to record the transactions.

To determine

Note receivable:

Note receivable refers to a written promise received by the creditor from the debtor in formal, for the amounts to be settled 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. Notes receivable often used for the credit periods of more than 60 days.

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.

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.

To journalize: The entries to record the transactions.

Explanation of Solution

Journalize the entries to record the transactions.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 3	Notes receivable	18,000
	Cash		18,000
	(To record the loaned amount on note)
February 10	Accounts receivable – Company B	24,000
	Sales		24,000
	(To record the sales made on account)
February 10	Cost of merchandise sold	14,400
	Merchandise inventory		14,400
	(To record the cost of merchandise sold)
February 13	Accounts receivable – Company DC	60,000
	Sales		60,000
	(To record the sales made on account)
February 13	Cost of merchandise sold	54,000
	Merchandise inventory		54,000
	(To record the cost of merchandise sold)
March 12	Notes receivable	24,000
	Accounts receivable – Company B		24,000
	(To record the receipt of note on account)
March 14	Notes receivable	60,000
	Accounts receivable – Company DC		60,000
	(To record the receipt of note on account)
April 3	Notes receivable	18,000
	Cash	360
	Notes receivable		18,000
	Interest revenue (1)		360
	(To record the amount of interest received and renewal of the loan of January 3 )
May 11	Cash	$24,280
	Notes receivable		$24,000
	Interest revenue (2)		$280
	(To record the collection of cash on note of march 12)
May 13	Accounts receivable – Company D	$60,900
	Notes receivable		$60,000
	Interest revenue (3)		$900
	(To record dishonored note dated March 14)
July 12	Cash	$62,118
	Accounts receivable – Company DC		$60,900
	Interest revenue (4)		$1,218
	(To record collection of cash from the dishonored note from Company DC)
August 1	Cash	$18,540
	Notes receivable		$18,000
	Interest revenue (5)		$540
	(To record collection of cash on note of August 3)
October 5	Accounts receivable – Company H	$13,500
	Sales		$13,500
	(To record the sales made on account)
October 5	Cost of merchandise sold	$8,100
	Merchandise inventory		$8,100
	(To record the cost of merchandise sold)
October 15	Cash	$13,500
	Accounts receivable – Company H		$13,500
	(To record the collection of cash on account)

Table (1)

Working note:

For April 3:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$18,000}\times \frac{8\%}{100}\times \frac{\text{90 days}}{360\text{ days}}\right]\\ =\$360\end{array}$ (1)

For May 11:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$24,000}\times \frac{7\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$280\end{array}$ (2)

For May 13:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$60,000}\times \frac{9\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$900\end{array}$ (3)

For July 12:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$60,900}\times \frac{12\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$1,218\end{array}$ (4)

For August 1:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$18,000}\times \frac{9\%}{100}\times \frac{\text{120 days}}{360\text{ days}}\right]\\ =\$540\end{array}$ (5)

For the note received on granting loan, note receivable has to be created and accounts cash has to be decreased. Hence,

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

For the sales made on account, accounts receivable has to be increased and sales have to be increased. Hence,

• An increase in accounts receivable (asset account) is debited, and
• An increase in sales (stockholders’ equity account) is credited.

For recording the cost of goods sold, merchandise inventory has to be decreased, and cost of goods sold has to be recognized. Hence,

• An increase in cost of goods sold (expense account) is debited, and
• An increase in merchandise inventory (asset account) is credited.

For the note received on account, note receivable has to be created and accounts receivable has to be eliminated. Hence,

• An increase in notes receivable (asset account) is debited, and
• A decrease in accounts receivable (asset account) is credited.

For the cash collected on note along with interest, cash has to be increased, note receivable has to be eliminated, and interest revenue has to be recognized. Hence,

• An increase in cash (asset account) is debited,
• A decrease in notes receivable (asset account) is credited, and
• An increase in interest revenue (stockholders’ equity account) is credited.

For the note dishonored at maturity date, accounts receivable has to be created, note receivable has to be eliminated, and interest revenue has to be recognized. Hence,

• An increase in accounts receivable (asset account) is debited,
• A decrease in notes receivable (asset account) is credited, and
• An increase in interest revenue (stockholders’ equity account) is credited.