Respuesta :
Answer:
Calculate the interest amounts and use those calculated values to prepare journal entries.
a) Calculation of interest amounts:
1) Accrued interest on December 31 for Lee is calculated as follows:
$15,000 x 7% x 18/45 days = $420
2) Accrued interest on Jan. 27 for Lee:
$15,000 x 7% x 27/45 days = $630
3) Accrued Interest on April 15 for H. Chegg:
$7,000 x 8% x 30/30 days = $560
4) Accrued interest on June 1 for Tomas Company:
$9,000 x 10% x 90/90 days = $900
b) Journal entries:
1) Dec 13:
Debit Notes Receivable with $15,000
Credit Accounts Receivable with $15,000
To record the 45-day 7% Note from Miranda Lee
2) Adjusting Accrued Interest on December 31
Debit Interest Receivable on Notes with $420
Credit Interest on Notes with $420
To record accrued 18/45 days 7% interest on Miranda Lee's note due.
3) January 27:
Debit Cash with $16,050
Credit Notes Receivable with $15,000
Credit Interest on Notes with $630
Credit Interest Receivable on Notes with $420
To record full settlement on notes and interest by Miranda Lee.
4) March 3:
Debit Notes Receivable with $9,000
Credit Accounts Receivable with $9,000
To record the 10% 90-day note granted to Tomas Company.
5) March 17:
Debit Notes Receivable with $7,000
Credit Accounts Receivable with $7,000
To record the 8% 30-day note granted to H. Cheng.
6) April 16:
Debit Accounts Receivable with $7,000
Credit Notes Receivable with $7,000
To record the dishonor of note by H. Cheng.
Debit Interest Receivable on Notes with $560
Credit Interest on Note with $560
To record interest due on H. Cheng's note.
May 1:
Debit Bad debts with $7,560
Credit Accounts Receivable with $7,000
Credit Interest Receivable on Note with $560
To write off H. Cheng's account and the interest due on note.
June 1:
Debit Cash with $9,900
Credit Notes Receivable with $9,000
Credit Interest on Note with $900
To record full settlement of account by Tomas Company.
Explanation:
a) When a note is accepted, the Accounts Receivable is credited and the Notes Receivable is debited. This transfers the amount due from Accounts Receivable to Notes Receivable, effectively changing the nature of the debt. Accounts Receivable does not attract interest and is granted for a limited period unlike a Notes Receivable, which attracts agreed interest.
b) On December 31, the accrued interest on Lee's note is recognized in accordance with the matching principle and accrual concepts. Therefore, 18 days' interest is accrued as calculated above.
c) When a note receivable is settled, the Cash Account is debited with a credit to Notes Receivable and another credit to Interest Receivable on Note, if it had been accrued or Interest on Note account.
d) If a note receivable is dishonored, the accounts are reversed accordingly with a debit to the Accounts Receivable and a credit to the Notes Receivable.
e) When a dishonored note is written off, the Accounts Receivable is credited and Bad Debts is debited.
