Chapter 17, Problem 11SPA

NOTES RECEIVABLE DISCOUNTING Marienau Suppliers had the following transactions:

REQUIRED

Record the transactions in a general journal.

To determine

Prepare a journal entry to record Suppliers M.

Explanation of Solution

Note receivable:

Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or, borrower to the lender or creditor. Notes receivable is an asset of a business.

Date	Account titles and Explanation	Debit	Credit
March 1	Accounts receivable -G.P	$5,000
	Sales		$5,000
	(To record sale made on account)
March 20	Notes receivable	$5,000
	Accounts receivable - G.P		$5,000
	(To record received note to settle  account)
March 30	Cash (1)	$4,984.78
	Interest expense (2)	$15.22
	Notes receivable		$5,000
	(To record discount on notes receivable)
April 20	Notes receivable	$3,000
	Sales		$3,000
	(To record received note for merchandise sale)
May 5	Cash (3)	$3,003.49
	Notes receivable		$3,000
	Interest revenue (4)		$3.49
	(To record received payment of note with interest)
June 19	Accounts receivable - D. L	$3,070
	Cash		$3,070
	(To record cash paid for dishonoured note)
July 31	Cash	$3,091.49
	Accounts receivable - D. L		$3,070
	Interest revenue (5)		$21.49
	(To record Collected dishonoured note with interest)
August 1	Accounts receivable - A.B	$5,600
	Sales		$5,600
	(To record sale made on account)
August 12	Cash	$400
	Notes receivable	$5,200
	Accounts receivable - A.B		$5,600
	(To record cash received and note to settle account)
September 11	Cash (6)	$421.67
	Notes receivable (new note)	$4,800
	Notes receivable (old note)		$5,200
	Interest revenue (7)		$21.67
	(To record received new note plus interest on old note)
September 26	Cash	$4,802.55
	Notes receivable		$4,800
	Interest revenue		$2.55
	(To record received payment of note with interest)
November 10	Accounts receivable - A.B	$4,888
	Cash		$4,888
	(To record cash paid for dishonoured note)
December 15	Cash	$4,916.51
	Accounts receivable - A.B		$4,888
	Interest revenue (8)		$28.51
	(To record Collected dishonoured note with interest)

Table (1)

Working notes:

(1) Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$5,000+\left(\$5,000\times 6\%\times \frac{90}{360}\right)\right)-\left(\$5,075\times 8\%\times \frac{80}{360}\right)\\ =\$5,075-\$90.22\\ =\$4,984.78\end{array}$

(2) Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable}-\text{Cash proceeds}\\ \text{= \$5,000}-\$4,984.78\\ =\$15.22\end{array}$

(3) Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$3,000+\left(\$3,000\times 6\%\times \frac{60}{360}\right)\right)-\left(\$3,030\times 7\%\times \frac{45}{360}\right)\\ =\$3,030-\$26.51\\ =\$3,003.49\end{array}$

(4) Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue =}\text{Cash proceeds}-\text{Notes receivable}\\ \text{= \$3,003}\text{.49}-\$3,000\\ =\$3.49\end{array}$

(5) Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue}\text{=}\text{Notes receivable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$3,070}\times \text{6\%}\times \frac{42}{360}\\ =\$21.49\end{array}$

(6) Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue}\text{=}\text{Notes receivable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$5,200}\times 5\text{\%}\times \frac{30}{360}\\ =\$21.67\end{array}$

(6) Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$4,800+\left(\$4,800\times 6\%\times \frac{60}{360}\right)\right)-\left(\$4,848\times 7.5\%\times \frac{45}{360}\right)\\ =\$4,848-\$45.45\\ =\$4,802.55\end{array}$

(7) Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue =}\text{Cash proceeds}-\text{Notes receivable}\\ \text{= \$4,802}\text{.55}-\$4,800\\ =\$2.55\end{array}$

(8) Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue}\text{=}\text{Notes receivable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$4,888}\times \text{6\%}\times \frac{35}{360}\\ =\$28.51\end{array}$