Chapter 5, Problem 5.8BP

1.

To determine

To record: The acceptance of the note on April 15, 2015.

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.

Journal entry for the acceptance of the note on April 15, 2015:

Date	Account Title and Explanation		Debit($)	Credit($)
April 15, 2015	Notes receivable (1)		110,000
		Service revenue		110,000
	(To record the services provided  and acceptance of note)

Table (1)

Description:

• Notes receivable is an asset and increased it. So, debit notes receivable account with $110,000.
• Service revenue is a component of stock holders’ equity and increased it. So credit service revenue with $110,000.

2.

To determine

To record: The interest collected on April 15 for 2016 and 2017 and the adjustment for interest revenue on December 31, 2015, 2016 and 2017.

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.

Journal entry for adjustment of interest receivable:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2015	Interest receivable (1)		9,350
		Interest revenue		9,350
	(To record adjustment for accrued interest)

Table (2)

Journal entry for receipt of annual interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
April 15, 2016	Cash		13,200
2015		Interest receivable (1)		9,350
		Interest revenue (2)		3,850
	(To record receipt of annual interest)

Table (3)

Journal entry for adjustment for accrues interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2016	Interest receivable (1)		9,350
		Interest revenue		9,350
	(To record adjustment for accrued interest)

Table (4)

Journal entry for receipt of annual interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
April 15, 2017	Cash		13,200
2016		Interest receivable (1)		9,350
		Interest revenue (2)		3,850
	(To record receipt of annual interest)

Table (5)

 Journal entry for adjustment for accrues interest:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2017	Interest receivable (1) (2016)		9,350
		Interest revenue		9,350
	(To record adjustment for accrued interest)

Table (6)

Description:

For Adjustment of interest receivable on December 31, 2015:

• 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 April 15, 2016:

• 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, 2016:

• 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 April 15, 2017:

• 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, 2017:

• 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 April 15, 2018:

Explanation of Solution

Journal entry for cash collection on April 15, 2018:

Date	Account Title and Explanation		Debit ($)	Credit ($)
April 15, 2018	Cash		123,200
		Notes receivable		110,000
2017		Interest receivable (1)		9,350
		Interest revenue (2)		3,850
	(To record cash collection of the note and interest)

Table (7)

Description:

For receiving of annual interest on April 15, 2018:

• 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.