Chapter 8, Problem 8.6BPR

Sales and notes receivable transactions

The following were selected from among the transactions completed during the current year by Danix Co., an appliance wholesale company:

Jan.	21.	Sold merchandise on account to Black Tie Co., $28,000. The cost of goods sold was $16,800.
Mar.	18.	Accepted a 60-day, 6% note for $28,000 from Black Tie Co. on account.
May.	17.	Received from BlackTie Co. the amount due on the note of March 18.
June.	15.	Sold merchandise on account, terms 1/10, n/30, to Pioneer Co. for $17,700. Record the sale net of the discount. The cost of goods sold was $ 10,600.
	21.	Loaned $ 18,000 cash to JR Stutts, receiving a 30-day, 8% note.
	25.	Received from Pioneer Co. the amount due on the invoice of June 15, less 1% discount.
July.	21.	Received the interest due from JR Stutts and a new 60-day, 9% note as a renewal of the loan of June 21. (Record both the debit and the credit to the notes receivable account.)
Sept.	19.	Received from JR Stutts the amount due on her note of July 21.
	22.	Sold merchandise on account to Wycoff Co., $20,000. The cost of goods sold was $12,000.
Oct.	14	Accepted a 30-day, 6% note for $20,000 from Wycoff Co. on account.
Nov.	13.	Wycoff Co. dishonored the note dated October 14.
Dec.	28.	Received from Wycoff Co. the amount owed on the dishonored note, plus interest for 45 days at 8% computed on the maturity value of the note.

Instructions

Journalize the entries to record the transactions.

To determine

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.

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

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.

To journalize: The entries to record the transactions.

Answer to Problem 8.6BPR

Journalize the entries to record the transactions.

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 21	Accounts receivable – Company B	28,000
	Sales		28,000
	(To record the sales made on account)
January 21	Cost of merchandise sold	16,800
	Merchandise inventory		16,800
	(To record the cost of merchandise sold)
March 18	Notes receivable	28,000
	Accounts receivable – Company B		28,000
	(To record the receipt of note on account)
May 17	Cash	$28,280
	Notes receivable		$28,000
	Interest revenue (1)		$280
	(To record the collection of cash on note of march 18)
June 15	Accounts receivable – Company P	17,523
	Sales (2)		17,523
	(To record the sales net of discount, on account)
June 15	Cost of merchandise sold	10,600
	Merchandise inventory		10,600
	(To record the cost of merchandise sold)
June 21	Notes receivable	18,000
	Cash		18,000
	(To record the loaned amount on note)
June 25	Cash	17,523
	Accounts receivable – Company P		17,523
	(To record the collection of cash on account)
July 21	Notes receivable	18,000
	Cash	120
	Notes receivable		18,000
	Interest revenue (3)		120
	(To record the amount of interest received and renewal of the loan of June 21 )
September 19	Cash	18,270
	Notes receivable		18,000
	Interest revenue (4)		270
	(To record the collection of cash on note of July 21)
September 22	Accounts receivable – Company W	20,000
	Sales		20,000
	(To record the sales made on account)
September 22	Cost of merchandise sold	12,000
	Merchandise inventory		12,000
	(To record the cost of merchandise sold)
October 14	Notes receivable	20,000
	Accounts receivable – Company W		20,000
	(To record the receipt of note on account)
November 13	Accounts receivable – Company W	$20,100
	Notes receivable		$20,000
	Interest revenue (5)		$100
	(To record dishonored note dated October 14)
December 28	Cash	$20,301
	Accounts receivable – Company W		$20,100
	Interest revenue (6)		$201
	(To record collection of cash from the dishonored note from Company W)

Explanation of Solution

Working note:

For May 17:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$28,000}\times \frac{6\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$280\end{array}$ (1)

For June 15:

Calculate the amount of sales.

$\begin{array}{c}\text{Sales = Gross sales }-1\%\text{Discount}\\ \text{=\$17,700}-\left(\text{\$17,700}\times 1\%\right)\\ =\$17,700-\$177\\ =\$17,523\end{array}$ (2)

For July 21:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$18,000}\times \frac{8\%}{100}\times \frac{\text{30 days}}{360\text{ days}}\right]\\ =\$120\end{array}$ (3)

For September 19:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$18,000}\times \frac{9\%}{100}\times \frac{\text{60 days}}{360\text{ days}}\right]\\ =\$270\end{array}$ (4)

For November 13:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$20,000}\times \frac{6\%}{100}\times \frac{\text{30 days}}{360\text{ days}}\right]\\ =\$100\end{array}$ (5)

For December 28:

Calculate the amount of interest revenue.

$\begin{array}{c}\text{Interest}\text{revenue=}\left[\begin{array}{l}\text{Face amount }\times \text{Annual interest rate}\\ \times \text{Time in terms of year}\end{array}\right]\\ \text{=}\left[\text{\$20,100}\times \frac{8\%}{100}\times \frac{\text{45 days}}{360\text{ days}}\right]\\ =\$201\end{array}$ (6)

For the sales made on account, accounts receivable has to be increased and sales have to be increased. Hence,

• An increase in accounts receivable (asset account) is debited, and
• An increase in sales (stockholders’ equity account) is credited.

For recording the cost of goods sold, merchandise inventory has to be decreased, and cost of goods sold has to be recognized. Hence,

• An increase in cost of goods sold (expense account) is debited, and
• An increase in merchandise inventory (asset account) is credited.

For the note received on account, note receivable has to be created and accounts receivable has to be eliminated. Hence,

• An increase in notes receivable (asset account) is debited, and
• A decrease in accounts receivable (asset account) is credited.

For the note received on granting loan, note receivable has to be created and accounts cash has to be decreased. Hence,

• An increase in notes receivable (asset account) is debited, and
• A decrease in cash (asset account) is credited.

For the cash collected on note along with interest, cash has to be increased, note receivable has to be eliminated, and interest revenue has to be recognized. Hence,

• An increase in cash (asset account) is debited,
• A decrease in notes receivable (asset account) is credited, and
• An increase in interest revenue (stockholders’ equity account) is credited.

For the note dishonored at maturity date, accounts receivable has to be created, note receivable has to be eliminated, and interest revenue has to be recognized. Hence,

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