Prepare journal entries in the books of both Company M, and other parties like Company R, KC Bank, and Bank L for each of the following transactions.
Explanation of Solution
Prepare journal entries in the books of Company M.
Date | Account titles and Explanation | Debit | Credit |
June 1 | Notes receivable | $3,000 | |
| $3,000 | ||
(To record received note to settle account) | |||
June 20 | Cash | $1,976.67 | |
Discount on notes payable (1) | $23.33 | ||
Notes payable | $2,000 | ||
(To record note issued for bank loan) | |||
July 1 | Cash (2) | $3,009.47 | |
Notes receivable | $3,000 | ||
Interest revenue (3) | $9.47 | ||
(To record discounted note to Company R) | |||
August 19 | Notes payable | $2,000 | |
Interest expense | $23.33 | ||
Cash | $2,000 | ||
Discount on notes payable | $23.33 | ||
(To record note paid at maturity) | |||
August 30 | No |
Table (1)
Working notes:
(1) Calculate discount on notes payable.
Discount on notes payable = Notes payable × Interest rate × Time period= $2,000 × 7% × 60360= $23.33
(2) Calculate cash proceeds.
Cash proceeds = Maturity value −Discount amount (Difference in time period)= ($3,000+($3,000 × 6% × 90360))−($3,045 × 7%×60360 )= $3,045−$35.53= $3,009.47
(3) Calculate interest revenue.
Interest revenue = Cash proceeds−Notes receivable= $3,009.47−$3,000= $9.47
As on 1st June:
- Notes receivable is a current asset, and it is increased. Therefore, debit notes receivable account for $3,000.
- Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $3,000.
As on 20th June:
- Cash is a current asset, and it is increased. Therefore, debit cash account for $1,976.67.
- Discount on notes payable is a contra liability, and it is increased. Therefore, debit discount on notes payable account for $23.33.
- Notes payable is a current liability, and it is increased. Therefore, credit notes payable account for $2,000.
As on 1st July:
- Cash is a current asset, and it is increased. Therefore, debit cash account for $3,009.47.
- Notes receivable is a current asset, and it is decreased. Therefore, credit notes receivable account for $3,000.
- Interest revenue is a component of
stockholders’ equity , and it increases revenue accounts. Therefore, credit interest revenue account for $9.47.
As on 19th August:
- Notes payable is a current liability, and it is decreased. Therefore, debit notes payable account for $2,000.
- Interest expense is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit interest expense account for $23.33.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $2,000.
- Discount on notes payable is a contra liability, and it is decreased. Therefore, credit discount on notes payable account for $23.33.
Prepare journal entries in the books of Company R.
Date | Account titles and Explanation | Debit | Credit |
June 1 | Accounts payable - Company M | $3,000 | |
Notes payable | $3,000 | ||
(To record notes issued to settle account) | |||
August 30 | Notes payable | $3,000 | |
Interest expense | $45 | ||
Cash | $3,045 | ||
(To record notes paid to L bank) |
Table (2)
As on 1st June:
- Accounts payable is a current liability, and it is decreased. Therefore, debit accounts payable account for $3,000.
- Notes payable is a current liability, and it is increased. Therefore, credit notes payable account for $3,000.
As on 30th August:
- Notes payable is a current liability, and it is decreased. Therefore, debit notes payable account for $3,000.
- Interest expense is a component of stockholders’ equity, and it increase expense accounts. Therefore, debit interest expense account for $45.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $3,045.
Prepare journal entries in the books of KC Bank.
Date | Account titles and Explanation | Debit | Credit |
June 20 | Notes receivable | $2,000 | |
Cash | $1,976.67 | ||
Discount on notes receivable | $23.33 | ||
(To record notes received for loan) | |||
August 19 | Cash | $2,000 | |
Discount on notes receivable | $23.33 | ||
Notes receivable | $2,000 | ||
Interest revenue | $23.33 | ||
(To record notes collected from Company M) |
Table (3)
As on 20th June:
- Notes receivable is a current asset, and it is increased. Therefore, debit notes receivable account for $2,000.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $1,976.67.
- Discount on notes receivable is a contra asset, and it is increased. Therefore, credit discount on notes receivable account for $23.33.
As on 19th August:
- Cash is a current asset, and it is increased. Therefore, debit cash account for $2,000.
- Discount on notes receivable is a contra asset, and it is decreased. Therefore, debit discount on notes receivable account for $23.33.
- Notes receivable is a current asset, and it is decreased. Therefore, credit notes receivable account for $2,000.
- Interest revenue is a component of stockholders’ equity, and it increase revenue accounts. Therefore, credit interest revenue account for $23.33.
Prepare journal entries in the books of L Bank.
Date | Account titles and Explanation | Debit | Credit |
July 1 | Notes receivable | $3,000 | |
Interest receivable | $9.47 | ||
Cash | $3,009.47 | ||
(To record discounted note accepted) | |||
August 30 | Cash | $3,045 | |
Notes receivable | $3,000 | ||
Interest receivable | $9.47 | ||
Interest revenue | $35.53 | ||
(To record note collected from Company R) |
Table (4)
As on 1st July:
- Notes receivable is a current asset, and it is increased. Therefore, debit notes receivable account for $3,000.
- Interest receivable is a current asset, and it is increased. Therefore, debit interest receivable account for $9.47.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $3,009.47.
As on 30th August:
- Cash is a current asset, and it is increased. Therefore, debit cash account for $3,045.
- Notes receivable is a current asset, and it is decreased. Therefore, credit notes receivable account for $3,000.
- Interest receivable is a current asset, and it is decreased. Therefore, credit interest receivable account for $9.47.
- Interest revenue is a component of stockholders’ equity, and it increase revenue accounts. Therefore, credit interest revenue account for $35.53.
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