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Chapter 8: Q32PGA (page 477)

Accounting for notes receivable and accruing interestCarley Realty loaned money and received the following notes during 2018.Note Date Principal Amount Interest Rate Term

(1) Apr. 1 $ 6,000 7% 1 year

(2) Sep. 30 12,000 6% 6 months

(3) Sep. 19 18,000 8% 90 days

Requirements

1. Determine the maturity date and maturity value of each note.

2. Journalize the entries to establish each Note Receivable and to record the collection ofprincipal and interest at maturity. Include a single adjusting entry on December 31, 2018, the fiscal year-end, to record accrued interest revenue on any applicable note.Explanations are not required. Round to the nearest dollar.

Short Answer

Expert verified

(1) Maturity date and maturity value

Note 1- 31 March 2019 and $6,420

Note 2- 31 March 2019 and$12,360

Note 3- 18 December 2018 and $18,355

(2) Journal entries are recorded in Step 3

Step by step solution

01

Definition of the maturity date

The maturity date of the note is the date at which the notes become due. On the maturity date, the amount of the notes receivable is received by the company.

02

Maturity date and maturity value

Note

Date

Principal

Time

Maturity date

Year

Value

1

April 1

$6,000

One year

31 March

2019

$6,420

2

September 30

$12,000

Six months

31 March

2019

$12,360

3

September 19

$18,000

90 days

18 December

2018

$18,355

Note 1-

Interest= Principal×Interest×Time=$6,000× 7%×1=$420

Note 2-

Interest= Principal×Interest×Time=$12,000×6%×612=$360

Note 3-

Interest= Principal×Interest×Time=$18,000×8%×90365=$355

03

Journal entries

Date

Particulars

Debit

Credit

April 1, 2018

Notes Receivable

$6,000

Cash

$6,000

(To entry for notes receivable)

September 30, 2018

Notes Receivable

$12,000

Cash

$12,000

(To entry for notes receivable)

September 19, 2018

Notes Receivable

$18,000

Cash

$18,000

(To entry for notes receivable)

December 18, 2018

Cash

$18,360

Notes Receivable

$18,000

Interest receivable

$360

(To notes receivable-3 is collected on maturity)

December 31, 2018

Interest Receivable

$315

Interest revenue

$315

(To interest accrues on note 1)

December 31, 2018

Interest Receivable

$180

Interest Revenue

$180

(To interest revenue accrue on note 2)

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Most popular questions from this chapter

Accounting for uncollectible accounts using the allowance method

(aging-of-receivables) and reporting receivables on the balance sheet

At September 30, 2018, the accounts of Spring Mountain Medical Center (SMMC)

include the following:

During the last quarter of 2018, SMMC completed the following selected transactions:

• Sales on account, \(475,000. Ignore Cost of Goods Sold.

• Collections on account, \)451,800.

• Wrote off accounts receivable as uncollectible: Randall, Co., \(1,800; Oliver Welch,

\)900; and Rain, Inc., \(500

• Recorded bad debts expense based on the aging of accounts receivable, as follows:

Age of Accounts

1–30 Days 31–60

Days

61–90

Days

Over 90

Days

Accounts Receivable \) 97,000 \( 37,000 \) 17,000 $ 14,000

Estimated percent uncollectible 0.3% 3% 30% 35%

Requirements

1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts.

Journalize the transactions (omit explanations) and post to the two accounts.

2. Show how Spring Mountain Medical Center should report net accounts receivable

on its December 31, 2018, balance sheet.

What is the difference between the percent-of-receivables and aging-of-receivables methods?

Accounting for uncollectible accounts using the allowance method

This problem continues the Canyon Canoe Company situation from Chapter 7.

Canyon Canoe Company has experienced rapid growth in its first few months of operations and has had a significant increase in customers renting canoes and purchasing T-shirts. Many of these customers are asking for credit terms. Amber and Zack Wilson, stockholders and company managers, have decided it is time to review their business transactions and update some of their business practices. Their first step is to make decisions about handling accounts receivable.

So far, year-to-date credit sales have been \(15,500. A review of outstanding

receivables resulted in the following aging schedule:


Age of Accounts as of June 30, 2019

Customer name

1-30 days

31-60 days

61-90 days

Over 90 days

Total balance

Canyon

\)250

\(250

Crazy trees

\)200

\(150

\)350

Early start Daycare

\(500

Lakefront Pavilion

\)575

\(500

\)575

Outdoor Center

\(300

\)300

Rivers Canoe Club

\(350

\)350

Sport Shirts

\(450

\)120

\(570

Zack’s Marina

\)75

\(75

\)225

Totals

\(1,900

\)345

\(375

\)500

$3,120

Requirements

1. The company wants to use the allowance method to estimate bad debts. Determine the estimated bad debts expense under the following methods at June 30, 2019. Assume a zero-beginning balance for Allowance for Bad Debts. Round to the nearest dollar.

a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.

b. Percent-of-receivables method, assuming 22.5% of receivables will not be

collected.

c. Aging-of-receivables method, assuming 5% of invoices 1–30 days will not be

collected, 20% of invoices 31–60 days, 40% of invoices 61–90 days, and 75% of

invoices over 90 days.

2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the percent-of-sales method.

3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare invoice.

4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad Debts before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those accounts. Assume a zero beginning balance for Allowance for Bad Debts.

5. Show how Canyon Canoe Company will report net accounts receivable on the balance sheet on June 30, 2019.

Dialex Watches completed the following selected transactions during 2018 and 2019:

2018

Dec. 31 Estimated that bad debts expense for the year was 3% of credit sales of

\(410,000 and recorded that amount as expense. The company uses the

allowance method.

31 Made the closing entry for bad debts expense.

2019

Jan. 17 Sold merchandise inventory to Marty White, \)400, on account. Ignore Cost of

Goods Sold.

Jun. 29 Wrote off Marty White’s account as uncollectible after repeated efforts to

collect from him.

Aug. 6 Received \(400 from Marty White, along with a letter apologizing for being

so late. Reinstated White’s account in full and recorded the cash receipt.

Dec. 31 Made a compound entry to write off the following accounts as uncollectible:

Barry Krisp, \)1,600; Maria Bryant, \(1,100; and Richard Renik, \)400.

31 Estimated that bad debts expense for the year was 3% on credit sales of

\(490,000 and recorded the expense.

31 Made the closing entry for bad debts expense.

Requirements

1.Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming

the accounts begin with a zero balance. Record the transactions in the general

journal (omit explanations), and post to the two T-accounts.

2.Assume the December 31, 2019, balance of Accounts Receivable is \)136,000. Show

how net accounts receivable would be reported on the balance sheet at that date.

What type of account must the sum of all subsidiary accounts be equal to?
See all solutions

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