Chapter 7, Problem 14E

a-1.

To determine

Journalize the receipt of note on August 1, Year 1.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the receipt of note on August 1, Year 1.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
Year 1
September	1	Notes Receivable			43,200
			Accounts Receivable			43,200
		(Record note receivable received in settlement of account receivable)

Table (1)

Description:

• Notes Receivable is an asset account. The amount to be received increased, and an increase in asset is debited.
• Accounts Receivable is an asset account. Since accounts receivable is settled by receipt of note, amount to be received decreased, and a decrease in asset is credited.

2.

To determine

Journalize the adjustment entry of accrued interest revenue on December 31, Year 1.

Explanation of Solution

Journalize the adjustment entry of accrued interest revenue on December 31, Year 1.

Date		Accounts and Explanation		Post Ref.	Debit ($)	Credit ($)
Year 1
December	31	Interest Receivable			1,620
			Interest Revenue			1,620
		(Record accrued interest on note)

Table (2)

Description:

• Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
• Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of interest accrued on December 31, Year 1.

$\begin{array}{c}\text{Interest accrued = }\left\{\begin{array}{l}\text{Principal amount of note × }\\ \text{Rate of interest×}\\ \text{Time period}\left(\text{From August 1 to December 31}\right)\end{array}\right\}\\ \text{= \$43,200×9\%×}\frac{5}{\text{12}}\\ \text{= \$1,620}\end{array}$

3.

To determine

Journalize the collection of principal and interest on the note on January 31, Year 2.

Explanation of Solution

Journalize the collection of principal and interest on the note on January 31, Year 2.

Date		Accounts and Explanation		Post Ref.	Debit ($)	Credit ($)
Year 2
January	31	Cash			45,144
			Notes Receivable			43,200
			Interest Receivable			1,620
			Interest Revenue			324
		(Record principal and interest collected on note)

Table (3)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Notes Receivable is an asset account. Since the note receivable is received, asset account decreased, and a decrease in asset is credited.
• Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
• Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of interest revenue on January 31, Year 2.

$\begin{array}{c}\text{Interest revenue = }\left\{\begin{array}{l}\text{Principal amount of note × }\\ \text{Rate of interest×}\\ \text{Time period}\left(\text{From December 31, Year 1 to January 31, Year 2}\right)\end{array}\right\}\\ \text{= \$43,200×9\%×}\frac{1}{\text{12}}\\ \text{= \$324}\end{array}$

b.

To determine

Journalize the transaction of the note being defaulted on January 31, Year 2.

Explanation of Solution

Journalize the transaction of the note being defaulted on January 31, Year 2.

Date		Accounts and Explanation		Post Ref.	Debit ($)	Credit ($)
Year 2
January	31	Accounts Receivable			45,144
			Notes Receivable			43,200
			Interest Receivable			1,620
			Interest Revenue			324
		(Record the note being defaulted)

Table (4)

Description:

• Accounts Receivable is an asset account. Since amount to be received has increased, asset account increased, and an increase in asset is debited.
• Notes Receivable is an asset account. Since the note receivable is received, asset account decreased, and a decrease in asset is credited.
• Interest Receivable is an asset account. Since interest to be received is received, asset value decreased, and a decrease in asset is credited.
• Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

b.

To determine

Indicate the effects of the transactions (1) to (4) in Part (a) on the given financial statement elements, as I (increase), or D (decrease), or NE (no effect).

Explanation of Solution

Indicate the effects of the transactions (1) to (4) in Part (a) on the given financial statement elements, as I (increase), or D (decrease), or NE (no effect).

Table (5)