Chapter 8, Problem 4PB

1.

To determine

Compute (a) the due date and (b) the amount of interest due at maturity.

Answer to Problem 4PB

Compute (a) the due date and (b) the amount of interest due at maturity.

	Due date	Amount of interest due at maturity
1.	February 13	$110 (1)
2.	April 23	$525 (2)
3.	October 10	$600 (3)
4.	November 6	$200 (4)
5.	January 14	$480 (5)
6.	February 8	$240 (6)

Table (1)

Explanation of Solution

Note receivable: Note receivable refers to a written promise received by the creditor from the debtor in formal, for the amounts to be settled within a stipulated period of time. This written promise is issued by a debtor or borrower to the lender or creditor. Notes receivable is an asset of a business. Notes receivable often used for the credit periods of more than 60 days.

Due date: Due date is the maturity date on note, on due date the borrower is supposed to repay the face value of the note along with interest.

Interest on note:  Interest on note is the amount charged on the principal value of note for the privilege of borrowing money. Interest is to be paid by the borrower and to be received by the lender.

Dishonored note: Note receivable refers to a written promise by the debtor for the amounts to be received within a stipulated period of time. Note is otherwise known as promissory note. If this promissory note is not settled by the debtor at its maturity date, then it became is known as dishonored note.

Working note 1: Calculate the amount of interest due at maturity for note 1:

  $\begin{array}{c}\text{Total interest}\text{=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$33,000}\times \frac{4\%}{100}\times \frac{\text{30 days}}{360\text{ days}}\right]\\ =\$110\end{array}$

Working note 2: Calculate the amount of interest due at maturity for note 2:

Calculate the amount of interest due at maturity.

  $\begin{array}{c}\text{Total interest}\text{=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$60,000}\times \frac{7\%}{100}\times \frac{\text{45 days}}{360\text{ days}}\right]\\ =\$525\end{array}$

Working note 3: Calculate the amount of interest due at maturity for note 3:

Calculate the amount of interest due at maturity.

  $\begin{array}{c}\text{Total interest}\text{=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$48,000}\times \frac{5\%}{100}\times \frac{\text{90 days}}{360\text{ days}}\right]\\ =\$600\end{array}$

Working note 4: Calculate the amount of interest due at maturity for note 4:

Calculate the amount of interest due at maturity.

  $\begin{array}{c}\text{Total interest}\text{=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$16,000}\times \frac{6\%}{100}\times \frac{\text{75 days}}{360\text{ days}}\right]\\ =\$200\end{array}$

Working note 5: Calculate the amount of interest due at maturity for note 5:

Calculate the amount of interest due at maturity.

  $\begin{array}{c}\text{Total interest}\text{=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$36,000}\times \frac{8\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$480\end{array}$

Working note 6: Calculate the amount of interest due at maturity for note 6:

Calculate the amount of interest due at maturity.

  $\begin{array}{c}\text{Total interest}\text{=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$24,000}\times \frac{6\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$240\end{array}$

Note: Due date has been identified by omitting the date of note received but including the due date.

2.

To determine

Prepare journal entry to record the dishonor of Note (3) on its due date.

Answer to Problem 4PB

Prepare journal entry to record the dishonor of Note (3) on its due date:

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 10	Accounts receivable	48,600
	Notes receivable		48,000
	Interest revenue (3)		600
	(To record dishonor of Note 3)

Table (2)

Explanation of Solution

Note 3 have been dishonored on its due date. To record the dishonor on note, full value of note and accrued interest on note must be recorded as accounts receivable at the date of maturity. To record the defaulted note, accounts receivable and interest revenue should be increased and notes receivable should be eliminated. Hence,

• • An increase in accounts receivable (asset account) is debited with $48,600,
• • A decrease in notes receivable (asset account) is credited with $48,000, and
• • An increase in interest revenue (stockholders’ equity account) is credited with $600.

3.

To determine

Prepare journal entry to record the adjusting entry for accrued interest on Notes (5) and (6) on December 31.

Answer to Problem 4PB

Prepare journal entry to record the adjusting entry for accrued interest on Notes (5) and (6) on December 31.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Interest receivable	452
	Interest revenue (9)		452
	(To record the interest revenue accrued on the Note 5 and Note 6 )

Table (3)

Explanation of Solution

Working Note 7: Calculate the amount of interest revenue accrued on Note 5 as on December 31.

  $\begin{array}{c}\begin{array}{l}\text{Interest revenue accrued on}\\ \text{Note 5 as on December 31}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Notes Receivable×Interest rate×}\\ \text{Time in terms of one year}\end{array}\right]\\ \text{= \$36,000×8\%×}\frac{\begin{array}{l}\text{Number of days accrued from}\\ \text{November 15 till December 31}\end{array}}{\text{360 days}}\\ =\text{\$36,000×8\%×}\frac{\text{46 days}}{\text{360 days}}\\ \text{=\$368}\end{array}$

Working Note 8: Calculate the amount of interest revenue accrued on Note 6 as on December 31.

  $\begin{array}{c}\begin{array}{l}\text{Interest revenue accrued on}\\ \text{Note 6 as on December 31}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Notes Receivable×Interest rate×}\\ \text{Time in terms of one year}\end{array}\right]\\ \text{= \$24,000×6\%×}\frac{\begin{array}{l}\text{Number of days accrued from}\\ \text{December 10 till December 31}\end{array}}{\text{360 days}}\\ =\text{\$24,000×6\%×}\frac{\text{21 days}}{\text{360 days}}\\ \text{=\$84}\end{array}$

Working Note 9: Calculate the total amount of interest revenue accrued on Note 5 and Note 6.

$\begin{array}{c}\begin{array}{l}\text{Total amount of interest revenue}\\ \text{accrued on Note 5 and Note 6}\end{array}\}=\left[\begin{array}{l}\text{Interest revenue accrued on Note 5+}\\ \text{Interest revenue accrued on Note 6}\end{array}\right]\\ =\$368\left(7\right)+\$84\left(8\right)\\ =\$452\end{array}$

On December 31, company has to record its accrued interest revenue on its note receivable, as December 31 is the accounting year end date of the company. This accrued interest revenue has to be recognized by increasing interest receivable and by increasing interest revenue of $452. Hence,

• • An increase in interest receivable (asset account) is debited with $452 (9), and
• • An increase in interest revenue (stockholders’ equity account) is credited with $452 (9).

4.

To determine

Prepare journal entries to record the receipt of the amounts due on Notes (5) and (6) in January.

Answer to Problem 4PB

Prepare journal entries to record the receipt of the amounts due on Notes (5) and (6) in January.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 14	Cash	36,480
	Notes receivable		36,000
	Interest receivable (7)		368
	Interest revenue (10)		112
	(To record the collection of cash on note 5 in full)

Table (4)

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 29	Cash	24,240
	Notes receivable		24,000
	Interest receivable (8)		84
	Interest revenue (11)		156
	(To record the collection of cash on note 6 in full)

Table (5)

Explanation of Solution

On January 14, company has collected cash on note along with interest on its note receivable on Note 5. When a notes receivable is matured, it has to be cancelled by decreasing the note receivable account.

• • To decrease the (asset account) note receivable, credit the note receivable account with $36,000.
• • Interest receivable has been collected at maturity. Hence, it has to be cancelled by decreasing the interest receivable account. To decrease the (asset account) interest receivable, credit the interest receivable account with $368 (7).
• • Interest revenue earned for last 28 days has to be recognized at maturity date. Hence, to increase the interest revenue balance, credit the interest revenue account with $112 (10).
• • Collection of cash on note increases cash. Hence, to increase the cash account balance, debit the cash account with $36,480.

Working Note 10: Calculate the amount of interest revenue earned on Note 5 from January 1 to January 14.

  $\begin{array}{c}\begin{array}{l}\text{Interest revenue earned}\\ \text{on Note 5 from January 1}\\ \text{to January 14}\end{array}\}=\left[\begin{array}{l}\text{Total interest due at maturity}\left(5\right)-\\ \text{Interest revenue accrued till December 31}\left(7\right)\end{array}\right]\\ =\$480-\$368\\ =\$112\end{array}$

On February 8, company has collected cash on note along with interest on its note receivable on Note 6. When a notes receivable is matured, it has to be cancelled by decreasing the note receivable account.

• • To decrease the (asset account) note receivable, credit the note receivable account with $24,000.
• • Interest receivable has been collected at maturity. Hence, it has to be cancelled by decreasing the interest receivable account. To decrease the (asset account) interest receivable, credit the interest receivable account with $84 (8).
• • Interest revenue earned for last 28 days has to be recognized at maturity date. Hence, to increase the interest revenue balance, credit the interest revenue account with $156 (11).
• • Collection of cash on note increases cash. Hence, to increase the cash account balance, debit the cash account with $24,240.

Working Note 11: Calculate the amount of interest revenue earned on Note 6 from January 1 to February 8.

$\begin{array}{c}\begin{array}{l}\text{Interest revenue earned}\\ \text{on Note 6 from January 1}\\ \text{to February}\text{8}\end{array}\}=\left[\begin{array}{l}\text{Total interest due at maturity}\left(6\right)-\\ \text{Interest revenue accrued till December 31}\left(8\right)\end{array}\right]\\ =\$240-\$84\\ =\$156\end{array}$