Chapter 8, Problem 8.8AP

(a)

To determine

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.

Note 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.

Credit card sales:

Credit card is an electronic card, which allows the credit card holders to buy something on credit at convenience and without paying immediate cash.

Businesses allow customers to buy its products through bank credit cards, such sales are termed as credit card sales. For such convenience, bank charges some percentage as service charge expense on the total value of goods, or services purchased on credit.

Procedure for debiting and crediting an account in journal entry:

• Increase in assets account, increase in expenses account, and decrease in liabilities account should be debited.
• Decrease in assets account, increase in revenue account, and increase in liabilities account should be credited.

To prepare:  The journal entry in the books of Company M for the transactions made in the month of July.

Answer to Problem 8.8AP

Prepare journal entry in the books of Company M to record its July month transactions.

Date	Account Title and Explanation	Debit	Credit
July 5	Accounts receivable	$4,500
	Sales revenue		$4,500
	(To record the sales made on account)
July 14	Cash (2)	$582
	Service Charge Expense (1)	$18
	Sales revenue		$600
	(To record the sale made on credit cards)
July 20	Cash	$6,120
	Notes receivable		$6,000
	Interest revenue (3)		$120
	(To record the collection of principal plus interest on Incorporation C’s note)
July 24	Cash	$7,930
	Notes receivable		$7,800
	Interest revenue (3)		$130
	(To record the collection of principal plus interest on Company B’s note)
July 31	Interest receivable	$50
	Interest revenue (5)		$50
	(To adjust accrued interest receivable)

Table (1)

Working note:

Calculate the amount of service charge expense.

$\begin{array}{c}\text{Service charge expense = }\left[\text{Sales}\times \text{Service charge in percentage}\right]\\ \text{=\$600}\times \text{3\%}\\ \text{=\$600}\times \frac{3}{100}\\ =\$18\end{array}$ (1)

Calculate the amount of cash received.

$\begin{array}{c}\text{Cash received = Sales revenue}-\text{Service charge expense}\\ \text{=\$600}-\$18\\ =\$582\end{array}$ (2)

Determine the interest revenue earned on Incorporation C’s note, as at July 20.

$\begin{array}{c}\begin{array}{l}\text{Interest revenue as}\\ \text{at July 20}\end{array}\}\text{= Face value}\times \text{Rate of interest}\times \text{Interest period}\\ \text{ = \$6,000}\times \frac{8}{100}\times \frac{90\text{days}}{360\text{days}}\\ =\$120\end{array}$ (3)

Determine the interest revenue earned on Company B’s note, as at July 24.

$\begin{array}{c}\begin{array}{l}\text{Interest revenue as}\\ \text{at July 24}\end{array}\}\text{= Face value}\times \text{Rate of interest}\times \text{Interest period}\\ \text{ = \$7,800}\times \frac{10}{100}\times \frac{60\text{days}}{360\text{days}}\\ =\$130\end{array}$ (4)

Determine the accrued interest receivable on Corporation B’s note, as at July 31.

$\begin{array}{c}\begin{array}{l}\text{Accrued interest}\\ \text{receivable as at July 31}\end{array}\}\text{= Face value}\times \text{Rate of interest}\times \text{Interest period}\\ \text{ = \$10,000}\times \frac{6}{100}\times \frac{1\text{months}}{12\text{ months}}\\ =\$50\end{array}$ (5)

Explanation of Solution

July 5:

Company M had made sales on account. This transaction increases accounts receivable and sales revenue, as sales has been made on credit.

• Accounts receivable is an asset account. Hence, it is debited to increase its balance by $4,500.
• Sales revenue is a revenue account. Increase in sales revenue, increases the stockholders’ equity. Hence, it is credited to increase its balance by $4,500.

July 14:

Company M has made sales for $600 and accepted a credit card payment. For accepting the credit card payment Company M has incurred 3% bank charge on its $600 sales. This transaction increases cash, service charge expense, and sales revenue. Hence,

• Cash is an asset account. Hence, an increase in cash is debited with $582(2),
• Service charge expense is an expense account. Hence, an increase in service charge expense is debited with $18(1), and
• Sales revenue is a revenue account. Hence, an increase in sales revenue is credited with $600.

July 20:

On July 20, Company M has collected cash on note plus interest on Incorporation C’s note. To record this transaction, both cash and interest revenue must be increased, and notes receivable must be decreased.

• Cash is an asset account, which is increased by $6,120. Hence, cash account is debited.
• Notes receivable is an asset account, which is decreased by $6,000. Hence, notes receivable is credited.
• Interest revenue is a revenue account, which is increased by $120. Hence, interest revenue is credited.

July 24:

On July 24, Company M has collected cash on note plus interest on Company B’s note. To record this transaction, both cash and interest revenue must be increased, and notes receivable must be decreased.

• Cash is an asset account, which is increased by $7,930. Hence, cash account is debited.
• Notes receivable is an asset account, which is decreased by $7,800. Hence, notes receivable is credited.
• Interest revenue is a revenue account, which is increased by $130. Hence, interest revenue is credited.

July 31:

On July 31, Company M has to record accrued interest revenue of $50 (5) on Corporation B’s note due. To record this accrued interest revenue, both interest receivable, and interest revenue must be increased by $50.

• Interest receivable is an asset, thus interest receivable is debited to increase its balance by $50.
• Interest revenue is a stockholders’ equity account, thus interest revenue is credited to increase its balance by $50.

(b)

To determine

To post: The above entries in all of the receivables account.

Answer to Problem 8.8AP

Notes receivable:

Notes receivable
Date	Particulars	Debit	Date	Particulars	Credit
July 1	Balance	$23,800	July 20	Cash	$6,000
			July 24	Cash	$7,800
	Total	$23,800		Total	$13,800
July 31	Ending balance	$10,000

Table (2)

Interest receivable:

Interest receivable
Date	Particulars	Debit	Date	Particulars	Credit
July 31	Interest revenue	$50
	Total	$50		Total	$0
July 31	Ending balance	$50

Table (3)

Accounts receivable:

Accounts receivable
Date	Particulars	Debit	Date	Particulars	Credit
July 5	Interest revenue	$4,500
	Total	$4,500		Total	$0
July 31	Ending balance	$4,500

Table (4)

Explanation of Solution

Normal balance of Notes receivable account is a debit balance; therefore, debit increases Notes receivable account balance and a credit decreases Notes receivable account balance. Difference between $23,800 of total debit side balance and $13,800 of total credit side balance resulted in the ending balance of $10,000.

Normal balance of Interest receivable is a debit balance; therefore, debit increases Interest receivable account balance and a credit decreases Interest receivable account balance. Difference between $50 of total debit side balance and $0 of total credit side balance resulted in the ending balance of $50.

Normal balance of Accounts receivable is a debit balance; therefore, debit increases Accounts receivable account balance and a credit decreases Accounts receivable account balance. Difference between $4,500 of total debit side balance and $0 of total credit side balance resulted in the ending balance of $4,500.

(c)

To determine

To show: The balance sheet presentation of receivables account at July 31.

Answer to Problem 8.8AP

Prepare a balance sheet presentation of Company M’s receivables.

Company M Balance Sheet (Partial) As at July 31
Assets	Amount (in thousands)
Current assets:
Notes receivables	$10,000
Accounts receivables	$4,500
Interest receivables	$50
Total receivables	$14,550

Table (5)

Explanation of Solution

Notes receivable, accounts receivable, and interest receivables are current assets, which would be reported under the asset section of the balance sheet.