Chapter 6, Problem 17E

Interest-Bearing and Non-Interest-Bearing Notes On December 11, 2019, Hooper Inc. made a credit sale to Marshall Company and required Marshall to sign a $12,000,60-day note.

Required:

Prepare the journal entries necessary to record the receipt of the note by Hooper, the accrual of interest on December 31, 2019, and the customer’s repayment on February 9, 2020, assuming:

1. 1. Interest of 12% was in addition to the face value of the note.
2. 2. The note was issued as a $12,000 non-interest-bearing note with a present value of $11,765. The implicit interest rate on the note receivable was 12%. Assume a 360-day year. (Round to the nearest dollar.)

To determine

Journalize the transactions to record the receipt of the note, if interest of 12% is assessed in addition to the face value of the note.

Explanation of Solution

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Accrued interest on notes receivable:

Accrued interest on notes receivable is interest revenue that is earned but not yet to be received and it is recorded for notes received during one period and due in the following period.

Prepare journal entries:

Date	Account Title and Explanation	Debit	Credit
2019	Notes Receivable	$12,000
	Sales revenue		$12,000
	(To record the receipt of the interest bearing note)

Table (1)

• Notes receivable is an asset and it is increased. Therefore, debit notes receivable account by $12,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $12,000.

Date	Account Title and Explanation	Debit	Credit
2019	Interest Receivable	$80
	Interest income		$80
	(To record the interest receivable and recognize the interest income)

Table (2)

• Interest receivable is an asset and it is increased. Therefore, debit notes receivable account by $80.
• Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $80.

Date	Account Title and Explanation	Debit	Credit
2020	Cash	$12,240
	Interest receivable (1)		$80
	Interest income (2)		$160
	Notes receivable		$12,000
	(To record the interest receivable and recognize the interest income)

Table (3)

• Cash is an asset and it is increased. Therefore, debit cash account by $12,240.
• Interest receivable is an asset and it is decreased. Therefore, credit interest receivable account by $80.
• Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $160.
• Notes receivable is an asset and it is decreased. Therefore, credit notes receivable account by $12,000.

Working note:

(1) Calculate the amount of interest receivable:

$\begin{array}{c}\text{Interest}\text{receivable}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{notes}\text{receivable}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\text{Time}\text{period}\end{array}\right)\\ \text{=\$12,000×12\%×}\frac{\text{20}}{\text{360}}\\ \text{=\$80}\end{array}$

Note: Time period is calculated from December 11, 2019 (date of credit sale of note) to December 31, 2019 (date of interest accrued).

(2) Calculate the amount of interest income:

$\begin{array}{c}\text{Interest}\text{receivable}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{notes}\text{receivable}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\text{Time}\text{period}\end{array}\right)\\ \text{=\$12,000×12\%×}\frac{\text{40}}{\text{360}}\\ \text{=\$160}\end{array}$

Note: Time period is calculated from December 11, 2019 (date of credit sale of note) to February 9, 2019 (date of repayment).

To determine

Journalize the transactions to record the receipt of the note, if note is issued as a $12,000 non-interest bearing note with a present value if $11,765.

Explanation of Solution

Record the journal entries:

Date	Account Title and Explanation	Debit	Credit
2019	Notes Receivable	$12,000
	Discount on notes receivable		$235
	Sales revenue		$11,765
	(To record the receipt of the non-interest bearing note)

Table (4)

• Notes receivable is an asset and it is increased. Therefore, debit notes receivable account by $12,000.
• Discount on notes receivable is a contra asset account and it is increased. Therefore, credit discount on notes receivable account by $235.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $11,765.

Date	Account Title and Explanation	Debit	Credit
2019	Discount on notes receivable (3)	$78
	Interest income		$78
	(To record the amortization of discount on notes receivable and recognition of income)

Table (5)

• Discount on notes receivable is a contra asset account and it is decreased. Therefore, debit discount on notes receivable account by $78.
• Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $78.

Date	Account Title and Explanation	Debit	Credit
2020	Cash	$12,000
	Notes receivable		$12,000
	(To record the receipt of the face value of the note)

Table (6)

• Cash is an asset and it is increased. Therefore, debit cash account by $12,000.
• Notes receivable is an asset and it is decreased. Therefore, credit notes receivable account by $12,000.

Date	Account Title and Explanation	Debit	Credit
	Discount on notes receivable (4)	$157
	Interest income		$157
	(To record the amortization of discount on notes receivable and recognition of income)

Table (7)

• Discount on notes receivable is a contra asset account and it is decreased. Therefore, debit discount on notes receivable account by $157.
• Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $157.

Working note:

(3) Calculate the discount on notes receivable:

$\begin{array}{c}\begin{array}{l}\text{Discount on}\\ \text{notes}\text{receivable}\end{array}\}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{sales revenue (present value}\text{of}\text{note)}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\text{Time}\text{period}\end{array}\right)\\ \text{=\$11,765×12\%×}\frac{\text{20}}{\text{360}}\\ \text{=\$78}\end{array}$

Note: Time period is calculated from December 11, 2019 (date of credit sale of note) to December 31, 2019 (date of interest accrued).

(4) Calculate the discount on notes receivable:

$\begin{array}{c}\begin{array}{l}\text{Discount on}\\ \text{notes}\text{receivable}\end{array}\}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{sales revenue (present value}\text{of}\text{note)}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\text{Time}\text{period}\end{array}\right)\\ \text{=\$11,765×12\%×}\frac{\text{40}}{\text{360}}\\ \text{=\$157}\end{array}$

Note: Time period is calculated from December 11, 2019 (date of credit sale of note) to February 9, 2019 (date of repayment).