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Chapter 7: Question: P7 (page 373)

(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.

Short Answer

Expert verified

The interest of$2,400 for three months from October to December will accrue for each period.

Step by step solution

01

Definition of Note Receivable

A written promise made by a customer to repay the amount of money after a specified period along with interest charged in respect of the credit purchase made is known as note receivable

02

Journal Entries for Note

Date

Accounts and Explanation

Debit $

Credit $

1 Oct 2017

Note receivable

$120,000

Sales revenue

$120,000

31 Dec 2017

Interest receivable

$2,400

Interest revenue

$2,400

1 Oct 2018

Cash

$9,600

Interest receivable

$2,400

Interest revenue

$7,200

31 Dec 2018

Interest receivable

$2,400

Interest revenue

$2,400

1 Oct 2019

Cash

$129,600

Interest receivable

$2,400

Interest revenue

120,000×8%×912

$7,200

Note receivable

$120,000

Working note:

A. Accrued interest for 31 Dec each year.Interest=Principal×Interestrate×NumberofMonths12=$120,000×8%×312=$2,400

B. Interest earned for 1 Oct each year.

Interest=Principal×Rateofinterest×Numberofmonths12=$120,000×8%×912=$7,200

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Most popular questions from this chapter

Kraft Enterprises owns the following assets at December 31, 2017.

Cash in bank – saving account

68,000

Checking account balance

17,000

Cash on hand

9,300

Post-dated Checks

750

Cash refunded due from IRS

31,400

Certificate of deposits (180-days)

90,000

What amount should be reported as cash?

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of \(1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of \)82,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collection from customer $198,000.

(2) Merchandise purchased 320,000.

(3) Ending merchandise inventory by 90,000.

(4) Goods are marked to sell at 40% above cost.

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on the account.

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days

$300,000

.98

Between 16 and 30 days

100,000

.90

Between 31 and 45 days

80,000

.85

Between 46 and 60 days

40,000

.80

Between 61 and 75 days

20,000

.55

Over 75 days

15,000

.00

Instructions

(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

(b) Show how accounts receivable would be presented on the balance sheet.

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.

1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt’s books at a cost of \(590,000.

2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).

Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.

Use the information in BE7-10 for Wood. Assume that the receivables are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming that the recourse liability has a fair value of $7,500.
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