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.)
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 ((1)$5,034.75+(1)$6,008.50) | 11,043.25 | |
Loss from Sale of Receivable | |||
[((1)$11.08+(1)$16.50)+(1)$1,500.00] | 1,527.58 | ||
Recourse Liability | 1,500.00 | ||
Notes Receivable (Company B and D) | 11,000.00 | ||
Interest Income ((4)$45.83+ (8)$25) | 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:
Interest to maturity = (Note receivable × Percentage of interest×Time period)=$5,000×11%×90 days360days=$137.50
(3) Calculate the discount amount for company B:
Discount = (Maturity value of note × percentage of recourse liability× Time period)=$5,137.50×12%×(90days−30days)360days=$102.75
Note: 30 days is calculated from June 30 to July 30.
(4) Calculate the amount of accrued interest income for Company B:
Accrued interest income} = (Note receivable × Percentage of interest × Time period)=$5,000×11%×30 days360 days=$45.83
Note: 30 days is calculated from June 30 to July 30.
(5) Calculate the amount of book value note for company B:
Book value of note} = (Face value of note + Accrued interest income)=$5,000+$45.83 (4)=$5,045.83
(6) Calculate the interest to maturity of note for Company D:
Interest to maturity = (Note receivable × Percentage of interest×Time period)=$6,000×10%×60 days360days=$100
(7) Calculate the discount amount for company D:
Discount = (Maturity value of note × percentage of recourse liability× Time period)=$6,100.50×12%×(60days−15days)360days=$91.50
Note: 15 days is calculated from June 30 to July 15.
(8) Calculate the amount of accrued interest income for company D:
Accrued interest income} = (Note receivable × Percentage of interest × Time period)=$6,000×10%×15 days360 days=$25
Note: 15 days is calculated from June 30 to July 15.
(9) Calculate the amount of book value note company D:
Book value of note} = (Face value of note + Accrued interest income)=$6,000+$25 (8)=$6,025
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