Chapter 5, Problem 5.8AP

1.

To determine

To record: The acceptance of the note on December 1, 2018.

Answer to Problem 5.8AP

Journal entry for the acceptance of the note on December 1, 2018:

Date	Account Title and Explanation		Debit($)	Credit($)
December 1, 2018.	Notes receivable (1)		90,000
		Service revenue		90,000
	(To record the services provided  and acceptance of note)

Table (1)

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 lender or creditor. Notes receivable is an asset of a business.

• Notes receivable is an asset and increased it. So, debit notes receivable account.
• Service revenue is a component of stock holders’ equity and increased it. So credit service revenue  account.

2.

To determine

To record: The interest collected on December  1, for 2019 and 2020 and the adjustment for interest revenue on December 31, 2018, 2019 and 2020.

Answer to Problem 5.8AP

Journal entry for adjustment of interest receivable:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2018	Interest receivable (1)		750
		Interest revenue		750
	(To record adjustment for accrued interest)

Table (2)

Journal entry for receipt of annual interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 1, 2019	Cash		9,000
2018		Interest receivable (1)		750
		Interest revenue (2)		8,250
	(To record receipt of annual interest)

Table (3)

 Journal entry for adjustment for accrues interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2019	Interest receivable (1)		750
		Interest revenue		750
	(To record adjustment for accrued interest)

Table (4)

Journal entry for receipt of annual interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 1, 2020	Cash		9,000
2019		Interest receivable (1)		750
		Interest revenue (2)		8,250
	(To record receipt of annual interest)

Table (5)

 Journal entry for adjustment for accrues interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2020	Interest receivable (1) (2019)		750
		Interest revenue		750
	(To record adjustment for accrued interest)

Table (6)

Explanation of Solution

Interest receivables:

Interest receivables, are non-trade receivables as these are not resulted from sales transaction or business operations.

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 lender or creditor. Notes receivable is an asset of a business.

For Adjustment of interest receivable on December 31, 2018:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

Working notes:

$\begin{array}{c}\text{ Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$90,000\times 10\%\times \frac{11}{12}\\ =\$8,250\end{array}$ (1)

For receiving of annual interest on December 1, 2019:

• Cash is an asset and it increases. Hence debit the cash account.
• Interest receivable is an asset and it decreases. Hence credit the interest receivable account.
• Interest revenue is a component of stockholders’ equity and it increases. Hence credit the interest revenue account.

Working notes:

$\begin{array}{c}\text{Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$90,000\times 10\%\times \frac{1}{12}\\ =\$750\end{array}$ (2)

For adjustment of interest receivable on December 31, 2019:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

Working notes:

$\begin{array}{c}\text{ Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$110,000\times 12\%\times \frac{8.5}{12}\\ =\$9,350\end{array}$ (1)

For receiving of annual interest on December 1, 2020:

• Cash is an asset and it increases. Hence debit the cash account.
• Interest receivable is an asset and it decreases. Hence credit the interest receivable account.
• Interest revenue is a component of stockholders’ equity and it increases. Hence credit the interest revenue account.

Working notes:

$\begin{array}{c}\text{Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$110,000\times 12\%\times \frac{3.5}{12}\\ =\$3,850\end{array}$ (2)

For adjustment of interest receivable on December 31, 2020:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

Working notes:

$\begin{array}{c}\text{ Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$110,000\times 12\%\times \frac{8.5}{12}\\ =\$9,350\end{array}$ (1)

3.

To determine

To record: Cash collection on December 1, 2021:

Answer to Problem 5.8AP

Journal entry for cash collection on December 1, 2021:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 1, 2021	Cash		99,000
		Notes receivable		90,000
2020		Interest receivable (1)		750
		Interest revenue (2)		8,250
	(To record cash collection of the note and interest)

Table (7)

Explanation of Solution

For receiving of annual interest on December 1, 2021:

• Cash is an asset and it increases. Hence debit the cash account.
• Notes receivable is an asset and it decreases. Hence credit the notes receivable account.
• Interest receivable is an asset and it decreases. Hence credit the interest receivable account.
• Interest revenue is a component of stockholders’ equity and it increases. Hence credit the interest revenue account.