Chapter 17, Problem 1CP

To determine

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
	Accounts receivable		$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 journal entry required

Table (1)

Working notes:

(1) Calculate discount on notes payable.

$\begin{array}{c}\text{Discount on notes payable =}\text{Notes payable}\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$2,000}\times \text{7\%}\times \frac{60}{360}\\ =\$23.33\end{array}$

(2) Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Maturity value }-\text{Discount amount (Difference in time period)}\\ \text{=}\left(\$3,000+\left(\$3,000\times 6\%\times \frac{90}{360}\right)\right)-\left(\$3,045\times 7\%\times \frac{60}{360}\right)\\ =\$3,045-\$35.53\\ =\$3,009.47\end{array}$

(3) Calculate interest revenue.

$\begin{array}{c}\text{Interest revenue =}\text{Cash proceeds}-\text{Notes receivable}\\ \text{= \$3,009}\text{.47}-\$3,000\\ =\$9.47\end{array}$

As on 1^st 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 20^th 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 1^st 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 19^th 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 1^st 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 30^th 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 20^th 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 19^th 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 1^st 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 30^th 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.