Chapter 6, Problem 19E

Recording the Sale of Notes Receivable Singer Corporation was involved in the following events in the current year:

Required:

Prepare the journal entries to record the preceding information on Singer’s accounting records. Assume that the company does not normally sell its notes. (Assume a 360-day year and round all answers to the nearest penny.)

To determine

Provide journal entries to record the previous information on Corporation S’ accounts.

Explanation of Solution

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 the lender or creditor. Notes receivable is an asset of a business.

Prepare journal entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
June 30	Notes Receivable (Company B)	5,000
	Sales Revenue		5,000
	(To record the receipt of the interest bearing note)
July 15	Notes Receivable (Company D)	6,000
	Accounts Receivable		6,000
	(To record the notes receivable)
June 30	Cash $\left(\left(1\right)\$5,034.75+\left(1\right)\$6,008.50\right)$	11,043.25
	Loss from Sale of Receivable
	$\left[\left((1)\$11.08+\text{(1)}\$16.50\right)+\text{(1)}\$1,500.00\right]$	1,527.58
	Recourse Liability		1,500.00
	Notes Receivable (Company B and D)		11,000.00
	Interest Income $\left((4)\$45.83+\text{ (8)}\$25\right)$		70.83
	(To record the note discounted on July 30)
September 30	Recourse liability	1,500
	Notes receivable dishonored	3,647.50
	Cash		5,147.50
	(To record the notes dishonored)

Table (1)

To record the receipt of the interest bearing note:

• Notes receivable is an asset and it is increased. Therefore, debit notes receivable account by $5,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $5,000.

To record the notes receivable:

• Notes receivable is an asset and it is increased. Therefore, debit notes receivable account by $6,000.
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account by $6,000.

To record the note discounted on July 30:

• Cash is an asset and it is increased. Therefore, debit cash account by $11,043.25
• Loss from sale of receivable is a component of stockholders’ equity and it is decreased. Therefore, debit loss from sale of receivables by $1,527.58
• Recourse liability is a liability and it is increased. Therefore, credit recourse liability by $1,500.
• Notes receivable is an asset and it is increased. Therefore, credit notes receivable account by $11,000.
• Interest income is a component of stockholders’ equity and it is increased. Therefore, credit interest income account by $70.83.

To record the notes dishonored:

• Recourse liability is a liability and it is decreased. Therefore, debit recourse liability account by $1,500.
• Notes dishonored are a component of stockholders’ equity and it is decreased. Therefore, debit notes dishonored account by $3,647.50.
• Cash is an asset and it is decreased. Therefore, credit cash account by $5,147.50.

Working note:

(1) Calculate the loss from sale of receivables:

Particulars	Company B	Company D
Face value of note	$5,000	$6,000
Interest to maturity	(2)$137.50	(6)$100
Maturity value of note	$5,137.50	$6,100
Discount	(3)($102.75)	(7)($91.50)
Proceeds	$5,034.75	$6,008.50
Book value of note	(5)$5,045.83	(9)$6,025
Loss from sale of receivable	($11.08)	($16.50)

Table (2)

(2) Calculate the interest to maturity of note for Company B:

$\begin{array}{c}\text{Interest}\text{to}\text{maturity}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{×}\\ \text{Percentage}\text{of}\text{interest×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$5,000×11\%×}\frac{\text{90}\text{days}}{\text{360days}}\\ \text{=\$137}\text{.50}\end{array}$

(3) Calculate the discount amount for company B:

$\begin{array}{c}\text{Discount}\text{=}\left(\begin{array}{l}\text{Maturity}\text{value}\text{of}\text{note}\text{×}\\ \text{percentage}\text{of}\text{recourse}\text{liability×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$5,137}\text{.50×12\%×}\frac{\text{(90days}-\text{30days)}}{\text{360days}}\\ \text{=\$102}\text{.75}\end{array}$

Note: 30 days is calculated from June 30 to July 30.

(4) Calculate the amount of accrued interest income for Company B:

$\begin{array}{c}\begin{array}{l}\text{Accrued}\text{interest}\\ \text{income}\end{array}\}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$5,000×11\%×}\frac{\text{30}\text{days}}{\text{360}\text{days}}\\ \text{=\$45}\text{.83}\end{array}$

Note: 30 days is calculated from June 30 to July 30.

(5) Calculate the amount of book value note for company B:

$\begin{array}{c}\begin{array}{l}\text{Book}\text{value}\\ \text{of}\text{note}\end{array}\}\text{=}\left(\begin{array}{l}\text{Face}\text{value}\text{of}\text{note}\text{+}\\ \text{Accrued}\text{interest}\text{income}\end{array}\right)\\ \text{=\$5,000+\$45}\text{.83}\text{(4)}\\ \text{=\$5,045}\text{.83}\end{array}$

(6) Calculate the interest to maturity of note for Company D:

$\begin{array}{c}\text{Interest}\text{to}\text{maturity}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{×}\\ \text{Percentage}\text{of}\text{interest×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$6,000×10\%×}\frac{\text{60}\text{days}}{\text{360days}}\\ \text{=\$100}\end{array}$

(7) Calculate the discount amount for company D:

$\begin{array}{c}\text{Discount}\text{=}\left(\begin{array}{l}\text{Maturity}\text{value}\text{of}\text{note}\text{×}\\ \text{percentage}\text{of}\text{recourse}\text{liability×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$6,100}\text{.50×12\%×}\frac{\text{(60days}-15\text{days)}}{\text{360days}}\\ \text{=\$91}\text{.50}\end{array}$

Note: 15 days is calculated from June 30 to July 15.

(8) Calculate the amount of accrued interest income for company D:

$\begin{array}{c}\begin{array}{l}\text{Accrued}\text{interest}\\ \text{income}\end{array}\}\text{=}\left(\begin{array}{l}\text{Note}\text{receivable}\text{×}\\ \text{Percentage}\text{of}\text{interest}\text{×}\\ \text{Time}\text{period}\end{array}\right)\\ \text{=\$6,000×10\%×}\frac{15\text{days}}{\text{360}\text{days}}\\ \text{=\$25}\end{array}$

Note: 15 days is calculated from June 30 to July 15.

(9) Calculate the amount of book value note company D:

$\begin{array}{c}\begin{array}{l}\text{Book}\text{value}\\ \text{of}\text{note}\end{array}\}\text{=}\left(\begin{array}{l}\text{Face}\text{value}\text{of}\text{note}\text{+}\\ \text{Accrued}\text{interest}\text{income}\end{array}\right)\\ \text{=\$6,000+\$25}\text{(8)}\\ \text{=\$6,025}\end{array}$