Chapter 5, Problem 8PA

1.

To determine

Prepare the acceptance of the note on December 1, 2021.

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 December 1, 2021:

Date	Account Title and Explanation		Debit($)	Credit($)
December 1, 2021	Notes receivable (1)		90,000
		Service revenue		90,000
	(To record the services provided  and acceptance of note)

Table (1)

• 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

Prepare journal entry to record the interest collected on December 1, for 2022 and 2023 and the adjustment for interest revenue on December 31, 2021, 2022 and 2023.

Explanation of Solution

Journal entry for adjustment of interest receivable:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 31, 2021	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, 2022	Cash		9,000
		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, 2022	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, 2023	Cash		9,000
		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, 2023	Interest receivable (1)		750
		Interest revenue		750
	(To record adjustment for accrued interest)

Table (6)

Working notes:

Calculate the amount of interest revenue accrued for 1 month (December 1 to 31):

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

(1)

Calculate the amount of interest revenue earned from January 1 to November 30:

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

(2)

It is given that interest has to be paid each year on December 1.  But, interest revenue has to be recorded and adjusted at the end of each year that is December 31 for $750.

For Adjustment of interest receivable on December 31, 2021:

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

For receiving of annual interest on December 1, 2022:

• 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.

For adjustment of interest receivable on December 31, 2022:

• 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.

For receiving of annual interest on December 1, 2023:

• 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.

For adjustment of interest receivable on December 31, 2023:

• 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.

3.

To determine

Record the journal entry for Cash collection on December 1, 2024:

Explanation of Solution

Journal entry for cash collection on December 1, 2024:

Date	Account Title and Explanation		Debit ($)	Credit ($)
December 1, 2024	Cash		99,000
		Notes receivable		90,000
		Interest receivable (1)		750
		Interest revenue (2)		8,250
	(To record cash collection of the note and interest)

Table (7)

For receiving of annual interest on December 1, 2024:

• 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.