Chapter 7, Problem 5PSB

1.

To determine

To prepare: Adjustment entry to record the given transactions for note receivables.

Nov 1 accepted a $4,800, 90 day, 8% note dated this day in granting S.J a time extension on his past − due account receivable.

Explanation of Solution

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov 16	Note Receivable (S.J)		4,800
	Accounts Receivable (S.J)			4,800
	(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 S.J note.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Interest Receivable		64
	Interest Revenue			64
	(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:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $4,800 for principle amount of notes, 8% for annual rate of interest and 60 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$4,800\times 8\%\times \frac{60}{365}\right]\\ =\$64\end{array}$

Jan 30 received S.J’s payment for principal and interest on the note dated November 1.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 30	Cash		4,896
	Note Receivable (S.J)			4,800
	…..Interest Revenue			32
	…..Interest Receivable			64
	(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.

Working Note:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $4,800 for principle amount of notes, 8% for annual rate of interest and 30 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$4,800\times 8\%\times \frac{30}{365}\right]\\ =\$32\end{array}$

Feb 28 accepted a $12,600, 30 day, 8% note dated this day in granting a time extension on the past due account receivable from K.Co.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 28	Note Receivable (K.Co.)		12,600
	Accounts Receivable (K.Co)			12,600
	(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 1 accepted a $6,200, 60 day, 12% note dated this day in granting M.S a time extension on his past due account receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar 1	Note Receivable (M.S)		6,200
	Accounts Receivable (M.S)			6,200
	(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.

Mar 30 K.Co dishonored its note when presented for payment.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar 30	Accounts Receivable (K.Co)		12,684
	Note Receivable (K.Co)			12,600
	…..Interest Revenue			84
	(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:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $12,600 for principle amount of notes, 8% for annual rate of interest and 30 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$12,600\times 8\%\times \frac{30}{365}\right]\\ =\$84\end{array}$

Apr 30 received payment of principal plus interest from M.S for the March 1 note.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Apr 30	Cash		6,324
	Note Receivable (N.C)			6,200
	…..Interest Revenue			124
	(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 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:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $6,200 for principle amount of notes, 12% for annual rate of interest and 60 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$6,200\times 12\%\times \frac{60}{365}\right]\\ =\$124\end{array}$

June 15 accepted a $2,000, 72 day, 8% note dated this day in granting a time extension on the past due account receivable of R.S.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jun 15	Note Receivable (R.S)		2,000
	Accounts Receivable (R.S)			2,000
	(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.

June 21 accepted $9,500, 90 day, 8% note dated this day in granting J.F a time extension on his past due account receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jun 21	Note Receivable (J.F)		9,500
	Accounts Receivable (J.F)			9,500
	(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.

Aug 26 received payment of principal plus interest from R.S for the note of June 15.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Aug 26	Cash		2,034
	Note Receivable (N.C)			2,032
	…..Interest Revenue			32
	(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:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $2,000 for principle amount of notes, 8% for annual rate of interest and 72 for number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$2,000\times 8\%\times \frac{72}{365}\right]\\ =\$32\end{array}$

Sep 19 received payment of principal plus interest from J.F for the June 21 note.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Sep 19	Cash		9,687
	Note Receivable (M)			9,500
	…..Interest Revenue			187
	(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:

Calculate interest on note receivable with the formula as follows:

$\text{Interest}=\left[\begin{array}{l}\text{Principle}\text{Amount}\text{of}\text{Notes}\times \text{Annual}\text{Rate}\text{of}\text{Interest}\\ \times \frac{\text{Number}\text{of}\text{Days}}{365}\end{array}\right]$

Substitute $9,500 for principle amount of notes, 8% for annual rate of interest and 90 as number of days in the above formula.

$\begin{array}{c}\text{Interest}=\left[\$9,500\times 8\%\times \frac{90}{365}\right]\\ =\$187\end{array}$

Nov 30 wrote off K.Co’s account against allowance for doubtful accounts.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov 30	Allowance for Doubtful Account		12,684
	Accounts Receivable (K.Co)			12,684
	(Being write off of uncollectible accounts receivable is recorded)

Table(12)

• 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 determine

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.

Conclusion

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