Chapter 8, Problem 8.2BP

1(a)

To determine

To Prepare: the journal entries on November1, 2015 for notes payable of Company EJ.

Answer to Problem 8.2BP

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
November 1	Cash	21,000,000
	Notes Payable		21,000,000
	(To record the issuance of notes payable)

(Table 1)

Explanation of Solution

Notes payable

Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

• Cash is an asset and it has increased the value of the asset, so debit it for $ 21,000,000.
• Note Payable is a liability and it has increased the value of the liability, so credit it for $ 21,000,000.

1(b)

To determine

To Prepare: the journal entries on November 1, 2015 for notes receivable of Company SNB.

Answer to Problem 8.2BP

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
November 1	Notes Receivable	21,000,000
	Cash		21,000,000
	(To record the acceptance of the note receivable)

(Table 2)

Explanation of Solution

Notes Receivable:

Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.

• Cash is an asset and it has decreased the value of the asset, so debit it for $ 21,000,000.
• Note Receivable is an asset and it has increased the value of the asset, so credit it for $ 21,000,000

2(a)

To determine

To Record: the adjustment entries on December 31, 2015 for notes payable of Company EJ.

Answer to Problem 8.2BP

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Interest Expense (a)	245,000
	Interest Payable (a)		245,000
	(To record the interest accrued, but not paid)

(Table 3)

Explanation of Solution

Notes payable

Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

Working Notes:

$\begin{array}{c}\text{Interest Payable = Notes Payable}\times \text{ Interest Percentage }\times \frac{2}{12}\\ =\text{ \$ 21,000,000 }\times \text{ 7\% }\times \frac{2}{12}\\ =\text{ \$245,000}\end{array}$ (a)

• Interest Expense is a component of stockholder’s equity and it has decreased the value of stockholder’s equity, so debit interest expense for $ 245,000.
• Interest payable is a liability and it has increased the value of liability, so credit it for $ 245,000.

Notes:

In this case there is an accrual of interest from November to December (2 months).

2(b)

To determine

To Record: the adjustment entries on December 31, 2015 for notes receivable of Company SNB.

Answer to Problem 8.2BP

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Interest Receivable (b)	245,000
	Interest Revenue (b)		245,000
	(To record interest earned, but not received)

(Table 4)

Explanation of Solution

Notes Receivable:

Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.

Working Notes:

$\begin{array}{c}\text{Interest Receivable = Notes Receivable}\times \text{ Interest Percentage }\times \frac{2}{12}\\ =\text{ \$ 21,000,000 }\times \text{ 7\% }\times \frac{2}{12}\\ =\text{ \$245,000}\end{array}$ (b)

• Interest Revenue is a component of stockholder’s equity and it increases the stockholder’s equity, so credit interest revenue for $ 245,000.
• Interest receivable is an asset and it decreases the value of the asset, so debit interest receivable for $ 245,000.

Note:

In this case there is an interest accrued from the month of November to December (2 months).

3(a)

To determine

To Prepare: the journal entries on April 30, 2016 for notes payable of Company EJ.

Answer to Problem 8.2BP

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
April 30	Notes Payable	21,000,000
	Interest Expense (c)	490,000
	Interest Payable (a)	245,000
	Cash		21,735,000
	( To record the payment of notes payable and interest)

(Table 5)

Explanation of Solution

Working Notes:

$\begin{array}{c}\text{Interest Expense = Principal Amount}\times \text{ Interest Percentage }\times \frac{4}{12}\\ =\text{ \$ 21,000,000 }\times \text{ 7\% }\times \frac{4}{12}\\ =\text{ \$ 490,000}\end{array}$ (c)

• Interest Expense for is a component of stockholder’s equity and there is a decrease in the value of stockholder’s equity, so debit interest expense for $ 490,000.
• Interest payable is a liability and decreased, so debit it for $ 245,000.
• Note Payable is a liability and decreased, so debit it for $ 21,000,000.
• Cash is an asset and decreased at the time of maturity, so credit it for $ 21,735,000.

3(b)

To determine

To Prepare: the journal entries on April 30, 2016 for notes receivable of Company SNB.

Answer to Problem 8.2BP

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
April 30	Cash	21,735,000
	Interest Revenue (d)		490,000
	Interest Receivable (b)		245,000
	Notes Receivable		21,000,000
	(To record the collection of notes receivable and interest)

(Table 6)

Explanation of Solution

Working Notes:

$\begin{array}{c}\text{Interest Revenue = Principal Amount}\times \text{ Interest Percentage }\times \frac{4}{12}\\ =\text{ \$ 41,000,000 }\times \text{ 7\% }\times \frac{4}{12}\\ =\text{ \$ 21,735,000}\end{array}$ (d)

• Interest Revenue for is a component of stockholder’s equity and there is a increase in the value of stockholder’s equity, so credit interest expense for $ 490,000.
• Interest receivable is asset and it has increased the value of the asset, so credit it for $ 245,000.
• Note receivable is an asset and it has increased the value of the asset, so credit it for $ 21,000,000.
• Cash is an asset and increased at the time of maturity, so debit it for $ 21,735,000.