Chapter 17, Problem 11SPB

NOTES RECEIVABLE DISCOUNTING Madison Graphics had the following notes receivable transactions:

REQUIRED

Record the transactions in a general journal.

To determine

Prepare a journal entry to record Suppliers MG.

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
May 1	Accounts receivable -L.C	$5,600
	Sales		$5,600
	(To record sale made on account)
May 20	Notes receivable	$5,600
	Accounts receivable - L.C		$5,600
	(To record received note to settle  account)
May 30	Cash (1)	$5,589.27
	Interest expense (2)	$10.73
	Notes receivable		$5,600
	(To record discount on notes receivable)
June 20	Notes receivable	$2,400
	Sales		$2,400
	(To record received note for merchandise sale)
July 25	Cash (3)	$2,411.37
	Notes receivable		$2,400
	Interest revenue (4)		$11.37
	(To record received payment of note with interest)
August 19	Accounts receivable - P.A	$2,454
	Cash		$2,454
	(To record cash paid for dishonoured note)
August 31	Cash	$2,458.91
	Accounts receivable - D. L		$2,454
	Interest revenue (5)		$4.91
	(To record Collected dishonoured note with interest)
September 1	Accounts receivable - B.F	$6,400
	Sales		$6,400
	(To record sale made on account)
September 12	Cash	$400
	Notes receivable	$5,600
	Accounts receivable - A.B		$6,000
	(To record cash received and note to settle account)
October 12	Cash (6)	$432.50
	Notes receivable (new note)	$5,600
	Notes receivable (old note)		$6,000
	Interest revenue (7)		$32.50
	(To record received new note plus interest on old note)
October 26	Cash	$5,607.42
	Notes receivable		$5,600
	Interest revenue		$7.42
	(To record received payment of note with interest)
December 11	Accounts receivable – B.F	$5,695.33
	Cash		$5,695.33
	(To record cash paid for dishonoured note)
December 27	Cash	$5,713.05
	Accounts receivable - A.B		$5,695.33
	Interest revenue (8)		$17.72
	(To record Collected dishonoured note with interest)

Table (1)

Working notes:

(1)Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$5,600+\left(\$5,600\times 6\%\times \frac{90}{360}\right)\right)-\left(\$5,684\times 7.5\%\times \frac{80}{360}\right)\\ =\$5,684-\$94.73\\ =\$5,589.27\end{array}$

(2)Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable}-\text{Cash proceeds}\\ \text{= \$5,600}-\$5,589.27\\ =\$10.73\end{array}$

(3)Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$2,400+\left(\$2,400\times 6\%\times \frac{60}{360}\right)\right)-\left(\$2,424\times 7.5\%\times \frac{25}{360}\right)\\ =\$2,424-\$12.63\\ =\$2,411.37\end{array}$

(4)Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue =}\text{Cash proceeds}-\text{Notes receivable}\\ \text{= \$2,411}\text{.37}-\$2,400\\ =\$11.37\end{array}$

(5)Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue}\text{=}\text{Notes receivable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$2,454}\times \text{6\%}\times \frac{12}{360}\\ =\$4.91\end{array}$

(6)Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue}\text{=}\text{Notes receivable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$6,000}\times 6.5\text{\%}\times \frac{30}{360}\\ =\$32.50\end{array}$

(6)Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$5,600+\left(\$5,600\times 7\%\times \frac{60}{360}\right)\right)-\left(\$5,665.33\times 8\%\times \frac{46}{360}\right)\\ =\$5,665.33-\$57.91\\ =\$5,607.42\end{array}$

(7)Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue =}\text{Cash proceeds}-\text{Notes receivable}\\ \text{= \$5,607}\text{.42}-\$5,600\\ =\$7.42\end{array}$

(8)Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue}\text{=}\text{Notes receivable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$5,695}\text{.33}\times 7\text{\%}\times \frac{16}{360}\\ =\$17.72\end{array}$