Chapter 7, Problem 5PSA

1.

To determine

To prepare:

Adjustment entry to record the given transactions for note receivables.

Dec 16 accepted a $10,800, 60 day, 8% note dated this day in granting D.T a time extension on his part due account receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 16	Note Receivable (D.T)		10,800
	Accounts Receivable (D.T)			10,800
	(Being receipt of note receivable by an account receivable is recorded )

Table (1)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Dec 31 made an adjusting entry to record the accrued interest on the D.T note.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Interest Receivable		36
	Interest Revenue			36
	(Being interest of one month on note receivable is recorded )

Table (2)

• Since, interest on notes receivable for one month will increase the value of interest receivable and interest receivable is an asset account, it is debited when it is increased.

• Since, interest for notes receivable will increase the amount of revenue and interest received is a revenue account, it is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 15 as number of days,

$\begin{array}{c}\text{Interest}=\left[\$10,800\times 8\%\times \frac{15}{365}\right]\\ =\$36\end{array}$

Feb 14 received D.T’s payment and interest on the note dated Dec 16.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 14	Cash		10,944
	Note Receivable (D.T.)			10,800
	Interest Revenue			108
	Interest Receivable			36
	(Being honor of note receivable is recorded )

Table (3)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account. It is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

• Since, the honor of note receivable by a customer will also reduce the amount for interest receivable and interest receivable is an asset account. It is credited when it is decreased.

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 45 as number of days,

$\begin{array}{c}\text{Interest}=\left[\$10,800\times 8\%\times \frac{45}{365}\right]\\ =\$180\end{array}$

Mar 2 accepted a $6,100, 8%, 90 day note dated this day in granting a time extension on the past due account receivable from M.Co.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar 2	Note Receivable (M Co)		6,100
	Accounts Receivable (M Co)			6,100
	(Being receipt of note receivable by an account receivable is recorded )

Table (4)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Mar 17 accepted a $2,400, 30 day, 7% note dated this day in granting A.P a time extension on the past due account receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar 17	Note Receivable (A.P)		2,400
	Accounts Receivable (A.P)			2,400
	(Being receipt of note receivable by an account receivable is recorded )

Table (5)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Apr 16 A.P dishonored her note when presented for payment.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Apr 16	Accounts Receivable (A.P)		2,414
	Note Receivable (A.P)			2,400
	…..Interest Revenue			14
	(Being receipt of note receivable by an account receivable is recorded )

Table (6)

• Since, the note has been dishonored when presented which means the amount belongs to bad debt expense. To record that a reverse for previous entry should be made which will increase the value of accounts receivable and since it is an asset account, it is debited when it is increased.

• Dishonored of note will decrease he value of note receivable and since it is an asset account, it is credited when it is decreased.

• Dishonored of note will also include the amount of interest that is to be received on note, so the interest amount will also be considered to be recorded and since it is revenue account, it is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $2,400 for principle amount of notes, 7% for annual rate of interest and 30 as number of days,

$\begin{array}{c}\text{Interest}=\left[\$2,400\times 7\%\times \frac{30}{365}\right]\\ =\$14\end{array}$

May 31 M Co refused to pay the note that due on May 31.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 31	Accounts Receivable (M Co)		6,222
	Note Receivable (M Co)			6,100
	…..Interest Revenue			122
	(Being receipt of note receivable by an account receivable is recorded )

Table (6)

• Since, the note has been dishonored when presented which means the amount belongs to bad debt expense. To record that a reverse for previous entry should be made which will increase the value of accounts receivable and since it is an asset account, it is debited when it is increased.

• Dishonored of note will decrease he value of note receivable and since it is an asset account, it is credited when it is decreased.

• Dishonored of note will also include the amount of interest that is to be received on note, so the interest amount will also be considered to be recorded and since it is revenue account, it is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $6,100 for principle amount of notes, 8% for annual rate of interest and 90 as number of days,

$\begin{array}{c}\text{Interest}=\left[\$6,100\times 8\%\times \frac{90}{365}\right]\\ =\$122\end{array}$

Jul 16 received payment from M Co for the maturity value of its dishonored note plus interest for 46 days beyond maturity at 8%.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jul 16	Cash		6,286
	Accounts Receivable (M.L)			6,222
	…..Interest Revenue			64
	(Being honor of note receivable is recorded )

Table (7)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account. It is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of account receivable and account receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $6,222 for principle amount of notes, 8% for annual rate of interest and 46 as number of days,

$\begin{array}{c}\text{Interest}=\left[\$6,222\times 8\%\times \frac{46}{365}\right]\\ =\$64\end{array}$

Aug 7 accepted a $7,450, 90 day, 10% note dated this day in granting a time extension on the past due account receivable of M.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 7	Note Receivable (M)		7,450
	Accounts Receivable (M)			7,450
	(Being receipt of note receivable by an account receivable is recorded )

Table (8)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Sep 3 accepted a $2,100, 60 day, 10% note dated this dated this day in granting N.C a time extension on his past due account receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Sep 3	Note Receivable (N.C)		2,100
	Accounts Receivable (N.C)			2,100
	(Being receipt of note receivable by an account receivable is recorded )

Table (9)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Nov 2 received payment of principal plus interest from N.C for the September note.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov 2	Cash		2,135
	Note Receivable (N.C)			2,100
	…..Interest Revenue			35
	(Being honor of note receivable is recorded )

Table (10)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account, it is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $2,100 for principle amount of notes, 10% for annual rate of interest and 60 as number of days.

$\begin{array}{c}\text{Interest}=\left[\$2,100\times 10\%\times \frac{60}{365}\right]\\ =\$35\end{array}$

Nov 5 received payment of principal plus interest from M for the August 7 note.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov 5	Cash		7,636
	Note Receivable (M)			7,450
	…..Interest Revenue			186
	(Being honor of note receivable is recorded )

Table (11)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account. It is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

$\text{Interest}=\left[\begin{array}{l}\left(\text{Principle}\text{amount}\text{of}\text{notes}\right)\times \left(\text{Annual}\text{rate}\text{of}\text{interest}\right)\\ \times \left(\frac{\text{Number}\text{of}\text{days}}{365}\right)\end{array}\right]$

Substitute $7,450 for principle amount of notes, 10% for annual rate of interest and 90 as number of days,

$\begin{array}{c}\text{Interest}=\left[\$7,450\times 10\%\times \frac{90}{365}\right]\\ =\$186\end{array}$

Dec 1 wrote off the A.P account against the allowance for doubtful accounts.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 1	Allowance for Doubtful Account		2,414
	Accounts Receivable (A.P)			2,414
	(Being write off of uncollectible accounts receivable is recorded)

Table (11)

• Since, in allowance method of accounting for accounts receivable the amount for bad debt expense is deducted from allowance for doubtful account which is a contra asset account, it is debited when it s decreased.

• Since, in allowance method of accounting for accounts receivable the deduction is made against the account receivable account which is an asset account, it is credited when it s decreased.

2.

To explain: The type of reporting that is necessary when a business pledges receivables as security for a loan and the loan is still outstanding at the end of the period.

Explanation of Solution

• The reporting can be provided as the footnote at the end of financial statement when a business pledges receivables as security for a loan and the loan is still outstanding at the end of the period.

• Since footnote refers to the ending note which is represented at the end of a financial statement which shows the details of a transaction which does not have any monetary impact on the company and cannot be recorded in the any of the financial statement but which is important for the users for financial statements and the given transaction is of same nature, it is provided as footnote at the end of a financial statement.

Thus, the reporting of given transaction will be provided as the footnote at the end of the financial statement.