Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
From page 5-9 of the VLN, the last practice problem where the company invested money for 4 months, how much interest revenue did the company earn in year 20XB?
Transcribed Image Text:Then record customer W’s payment:
Cash (A+)
Accounts Receivable (A-)
300
300
PART C: NOTES RECEIVABLE
Formal arrangement
- Indicates amount (Face value or Principal)
Due date
- Interest rate
- An asset to the lender (Note Receivable)
Interest Calculation--revisited
Px R x T
where:
P = Principal (FACE Value) is the amount borrowed
R= Annual interest rate
T = length of time the money was used this accounting period
(fraction of year).
Ехample:
The Company extends credit to Customer P for six months to
offset the A/R Customer P owes the Company. The terms of the
note are $10,000 due in six months at 12% interest. The date of
the note is February 1, 20XD. The due date is August 1, 20XD.
Record the note
2/1/XD Note Receivable (A+)
10,000
Accounts Receivable (A-)
10,000
Acceptance of a six month note at 12% interest to satisfy customer P's account
The amount of interest to accrue over the six months = $10,000 x
12% x 6/12 = $600
Record the receipt of payment for the note
8/1/XD Cash (A+)
10,600
Note Receivable (A-)
10,000
Interest revenue (R+àSE+)
600
Collection of note receivable plus interest (10,000 x.12 x 6/12)
If the note's term was for 12 months instead of six, we would
have to record an adjusting entry for interest at the end of the
year (December 31) prior to the note's due date on January 31.
12/31/XD Interest Receivable (A+)
1,100
1,100
Accrual of interest on note (10,000 x .12 x 11/12)
Interest Revenue (R+àSE+)
Then when the note is paid in January the company would
record:
1/31/XE Cash (A+)
Im.200
Note Receivable (A-)
10,000
Interest Receivable (A-)
1,100
Interest Revenue (R+àSE+)
100
Collection of note
(10,000 х .12 х 1/12)
Transcribed Image Text:Then when the note is paid in January the company would
record:
1/31/XE Cash (A+)
11,200
Note Receivable (A-)
10,000
Interest Receivable (A-)
1,100
Interest Revenue (R+àSE+)
100
Collection of note receivable, interest receivable and interest revenue (10,000 x .12 x 1/12)
Interest Revenue earned in 20XE is $100 (10,000 x .12 x 1/12).
Practice
The company lent $5,000 on July 1, 20XA at 10% interest for 9
months.
Determine interest revenue for 20XA.
Determine
interest
revenue
for
20XB
The company lent $9,000 on December 1, 20XA at 7% for 18
months.
Determine interest revenue for 20XA.
Determine interest revenue for 20XB
Determine
interest
revenue
for
20XC
The company invested $300,000 on September 30, 20XA at 4%
for 4 months.
Determine interest revenue for 20XB.
Receivables Analysis
Receivable Turnover Ratio
The receivables turnover ratio is a measure of the effectiveness
of a company's Credit Granting and Collection Activities.
Net credit sales
Receivables Turnover =
Average net trade accounts receivable
If you cannot determine net credit sales, use net sales as the
numerator in the above equation.
“Average" is calculated as follows: (last year's ending balance
+ this year's ending balance)/2
Average collection period= 365 days/Receivable turnover
Average length of time it takes to collect A/R
Chapter 5
Page 5-1
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