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Chapter 7: 9BE (page 363)

On October 1, 2017, Chung, Inc. assigns \(1,000,000 of its accounts receivable to Seneca National Bank as collateral for a \)750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

Short Answer

Expert verified

Interest expenses equals$20,000.

Step by step solution

01

Definition of Interest Revenue

Interest revenue is defined as the revenue generated by charging fees for the money lent to the borrower. It is collected at some specified percentage of the amount lent.

02

Journal Entry for Chung

Date

Accounts and Explanation

Debit $

Credit $

1 Oct 2017

Cash

$730,000

Interest expenses$1,000,000×2%

$20,000

Accounts receivables

$750,000

03

Journal Entry for Seneca

Date

Accounts and Explanation

Debit $

Credit $

1 Oct 2017

Note receivable

$750,000

Cash

$730,000

Interest Revenue$1,000,000×2%

$20,000

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Most popular questions from this chapter

Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable \(789,000. This balance consists of the following items:

Due from regular customer

\)523,000

Refund receivable on prior year’s income taxes (an established claim)

15,500

Travel advance to employees

22,000

Loan to wholly owned subsidiary

45,500

Advance to creditor for goods ordered

61,000

Accounts receivables assigned security for loans payable

75,000

Notes receivable past due plus interest on these notes

47,000

Total

$789,000

Illustrate how these items should be shown in the balance sheet as of December 31.

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account of \(600,000 and a commercial checking account balance of \)900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, \(5,000,000.

3. Travel advances of \)180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of \(1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of \)1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of \(190,000.

7. A bank overdraft of \)110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling \(500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2018, in the amount of \)125,000.

10. Eastwood has agreed to maintain a cash balance of \(500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased \)2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700.

Instructions

(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2017.

(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.

On September 30, 2016, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.

After receiving the first of two equal annual installments on September 30, 2017, Rolen immediately sold the note with recourse. On October 9, 2018, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.

Instructions

(c) How should Rolen account for the effects of the note being dishonored?

(Recording Bad Debts) At the end of 2017, Aramis Company has accounts receivable of \(800,000 and an allowance for doubtful accounts of \)40,000. On January 16, 2018, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and management authorized its write-off.

Instructions

(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.

(b) What is the net realizable value of Aramis Company’s accounts receivable before the write-off of the Ramirez receivable?

(c) What is the net realizable value of Aramis Company’s accounts receivable after the write-off of the Ramirez receivable?

(Notes Receivable with Realistic Interest Rate) On October 1, 2017, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden’s financial statements are prepared on a calendar-year basis.

Instructions

Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.
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