Chapter 8, Problem 2PA

1. a

To determine

Prepare the journal entry on October1, 2021 for notes payable of Company PC.

Answer to Problem 2PA

Prepare the journal entry on October1, 2021 for notes payable of Company PC as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
October 1, 2021	Cash	41,000,000
	Notes Payable		41,000,000
	(To record the issuance of notes payable)

Table 1

Explanation of Solution

Note payable:

Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.

Description:

• Cash is an asset and it increases the value of asset, so debit it for $41,000,000.
• Note Payable is a liability and it increases the value of liability, so credit it for $41,000,000.

1. b

To determine

Prepare the journal entry on October1, 2021 for notes receivable of Company M.

Answer to Problem 2PA

Prepare the journal entry on October1, 2021 for notes receivable of Company M as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
October 1, 2021	Notes Receivable	41,000,000
	Cash		41,000,000
	(To record the acceptance of the note receivable)

Table 2

Explanation of Solution

Notes receivable:

Notes receivable denotes a long-term asset that describes the amount to be received by the company. The note carries all the details of receivable amounts, principal and interest, and maturity dates.

Description:

• Note Receivable is an asset and it increases the value of asset, so debit it for $41,000,000.
• Cash is an asset and it decreases the value of asset, so credit it for $41,000,000.

2. a

To determine

Record the adjusting entry on December 31, 2021 for notes payable of Company PC.

Answer to Problem 2PA

Record the adjusting entry on December 31, 2021 for notes payable of Company PC as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31, 2021	Interest Expense	922,500
	Interest Payable (1)		922,500
	(To record the interest accrued, but not paid)

Table 3

Explanation of Solution

Working Notes:

 $\begin{array}{c}\text{Interest Payable = Notes Payable}\times \text{ Interest Percentage }\times \frac{3}{12}\\ =\text{ \$ 41,000,000 }\times \frac{\text{9}}{100}\times \frac{3}{12}\\ =\text{ \$922,500}\end{array}$ (1)

Description:

• Interest Expense is a component of stockholder’s equity and it decreases the value of stockholder’s equity, so debit interest expense for $922,500.
• Interest payable is a liability and it increases the value of liability, so credit it for $922,500.

Notes:

In this case, the interest is accrued from October to December (3 months).

2. b

To determine

Record the adjusting entry on December 31, 2021 for notes receivable of Company M.

Answer to Problem 2PA

Record the adjusting entry on December 31, 2021 for notes receivable of Company M as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31, 2021	Interest Receivable (2)	922,500
	Interest Revenue		922,500
	(To record interest earned, but not received)

Table 4

Explanation of Solution

Working Notes:

 $\begin{array}{c}\text{Interest Receivable = Notes Receivable}\times \text{ Interest Percentage }\times \frac{3}{12}\\ =\text{ \$ 41,000,000 }\times \frac{\text{9 }}{100}\times \frac{3}{12}\\ =\text{ \$922,500}\end{array}$ (2)

Description:

• Interest receivable is an asset and it decreases the value of asset, so debit interest receivable for $922,500.
• Interest Revenue is a component of stockholder’s equity and it increases the value of stockholder’s equity, so credit interest revenue for $922,500.

Note:

In this case, the interest is accrued from October to December (3 months).

3. a

To determine

Prepare the journal entries on September 30, 2022 for notes payable of Company PC.

Answer to Problem 2PA

Prepare the journal entries on September 30, 2022 for notes payable of Company PC as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
September 30, 2022	Notes Payable	41,000,000
	Interest Expense (3)	2,767,500
	Interest Payable (1)	922,500
	Cash		44,690,000
	( To record the payment of notes payable and interest)

Table 5

Explanation of Solution

Working Notes:

 $\begin{array}{c}\text{Interest Expense = Principal Amount}\times \text{ Interest Percentage }\times \frac{9}{12}\\ =\text{ \$ 41,000,000 }\times \frac{\text{9}}{100}\times \frac{9}{12}\\ =\text{ \$ 2,767,500}\end{array}$ (3)

Description:

• Interest Expense is a component of stockholder’s equity and there is a decrease in the value of stockholder’s equity, so debit interest expense for $2,767,500.
• Interest payable is a liability and it decreases the value of liabilities, so debit it for $922,500.
• Note Payable is a liability and  it decreases the value of liabilities, so debit it for $41,000,000.
• Cash is an asset and it decreases the value of assets at the time of maturity, so credit it for $44,690,000.

3. b

To determine

Prepare the journal entries on September 30, 2022 for notes receivable of Company M.

Answer to Problem 2PA

Prepare the journal entries on September 30, 2022 for notes receivable of Company M as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
September 30, 2022	Cash	44,690,000
	Interest Revenue (4)		2,767,500
	Interest Receivable (2)		922,500
	Notes Receivable		41,000,000
	(To record the collection of notes receivable and interest)

Table 6

Explanation of Solution

Working Notes:

 $\begin{array}{c}\text{Interest Revenue = Principal Amount}\times \text{ Interest Percentage }\times \frac{9}{12}\\ =\text{ \$ 41,000,000 }\times \frac{\text{9}}{100}\times \frac{9}{12}\\ =\text{ \$ 2,767,500}\end{array}$ (4)

Description:

• Cash is an asset and it decreases the value of assets at the time of maturity, so debit it for $44,690,000.
• Interest Revenue is a component of stockholder’s equity and there is an increase in the value of stockholder’s equity, so credit interest expense for $2,767,500.
• Interest receivable is asset and it increases the value of asset, so credit it for $922,500.
• Note receivable is an asset and it increases the value of asset, so credit it for $41,000,000.