Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
bartleby

Videos

Question
Book Icon
Chapter 7, Problem 5PSA

1.

To determine

To prepare:

Adjustment entry to record the given transactions for note receivables.

Dec 16 accepted a $10,800, 60 day, 8% note dated this day in granting D.T a time extension on his part due account receivable.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Dec 16 Note Receivable (D.T)   10,800  
  Accounts Receivable (D.T)     10,800
  (Being receipt of note receivable by an account receivable is recorded )      

Table (1)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Dec 31 made an adjusting entry to record the accrued interest on the D.T note.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Dec 31 Interest Receivable   36  
  Interest Revenue     36
  (Being interest of one month on note receivable is recorded )      

Table (2)

• Since, interest on notes receivable for one month will increase the value of interest receivable and interest receivable is an asset account, it is debited when it is increased.

• Since, interest for notes receivable will increase the amount of revenue and interest received is a revenue account, it is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 15 as number of days,

Interest=[$10,800×8%×15365]=$36

Feb 14 received D.T’s payment and interest on the note dated Dec 16.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Feb 14 Cash   10,944  
  Note Receivable (D.T.)     10,800
  Interest Revenue     108
  Interest Receivable     36
  (Being honor of note receivable is recorded )      

Table (3)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account. It is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

• Since, the honor of note receivable by a customer will also reduce the amount for interest receivable and interest receivable is an asset account. It is credited when it is decreased.

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $10,800 for principle amount of notes, 8% for annual rate of interest and 45 as number of days,

Interest=[$10,800×8%×45365]=$180

Mar 2 accepted a $6,100, 8%, 90 day note dated this day in granting a time extension on the past due account receivable from M.Co.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Mar 2 Note Receivable (M Co)   6,100  
  Accounts Receivable (M Co)     6,100
  (Being receipt of note receivable by an account receivable is recorded )      

Table (4)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Mar 17 accepted a $2,400, 30 day, 7% note dated this day in granting A.P a time extension on the past due account receivable.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Mar 17 Note Receivable (A.P)   2,400  
  Accounts Receivable (A.P)     2,400
  (Being receipt of note receivable by an account receivable is recorded )      

Table (5)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Apr 16 A.P dishonored her note when presented for payment.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Apr 16 Accounts Receivable (A.P)   2,414  
  Note Receivable (A.P)     2,400
  …..Interest Revenue     14
  (Being receipt of note receivable by an account receivable is recorded )      

Table (6)

• Since, the note has been dishonored when presented which means the amount belongs to bad debt expense. To record that a reverse for previous entry should be made which will increase the value of accounts receivable and since it is an asset account, it is debited when it is increased.

• Dishonored of note will decrease he value of note receivable and since it is an asset account, it is credited when it is decreased.

• Dishonored of note will also include the amount of interest that is to be received on note, so the interest amount will also be considered to be recorded and since it is revenue account, it is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $2,400 for principle amount of notes, 7% for annual rate of interest and 30 as number of days,

Interest=[$2,400×7%×30365]=$14

May 31 M Co refused to pay the note that due on May 31.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 31 Accounts Receivable (M Co)   6,222  
  Note Receivable (M Co)     6,100
  …..Interest Revenue     122
  (Being receipt of note receivable by an account receivable is recorded )      

Table (6)

• Since, the note has been dishonored when presented which means the amount belongs to bad debt expense. To record that a reverse for previous entry should be made which will increase the value of accounts receivable and since it is an asset account, it is debited when it is increased.

• Dishonored of note will decrease he value of note receivable and since it is an asset account, it is credited when it is decreased.

• Dishonored of note will also include the amount of interest that is to be received on note, so the interest amount will also be considered to be recorded and since it is revenue account, it is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $6,100 for principle amount of notes, 8% for annual rate of interest and 90 as number of days,

Interest=[$6,100×8%×90365]=$122

Jul 16 received payment from M Co for the maturity value of its dishonored note plus interest for 46 days beyond maturity at 8%.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Jul 16 Cash   6,286  
  Accounts Receivable (M.L)     6,222
  …..Interest Revenue     64
  (Being honor of note receivable is recorded )      

Table (7)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account. It is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of account receivable and account receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $6,222 for principle amount of notes, 8% for annual rate of interest and 46 as number of days,

Interest=[$6,222×8%×46365]=$64

Aug 7 accepted a $7,450, 90 day, 10% note dated this day in granting a time extension on the past due account receivable of M.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Aug 7 Note Receivable (M)   7,450  
  Accounts Receivable (M)     7,450
  (Being receipt of note receivable by an account receivable is recorded )      

Table (8)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Sep 3 accepted a $2,100, 60 day, 10% note dated this dated this day in granting N.C a time extension on his past due account receivable.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Sep 3 Note Receivable (N.C)   2,100  
  Accounts Receivable (N.C)     2,100
  (Being receipt of note receivable by an account receivable is recorded )      

Table (9)

• Since, receipt of note receivable would increase the amount of note receivable account and note receivable is an asset account, it is debited when it is increased.

• Since, receipt of note receivable by an account receivable would decrease the amount of accounts receivable and account receivable is an asset account, it is credited when it is decreased.

Nov 2 received payment of principal plus interest from N.C for the September note.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Nov 2 Cash   2,135  
  Note Receivable (N.C)     2,100
  …..Interest Revenue     35
  (Being honor of note receivable is recorded )      

Table (10)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account, it is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $2,100 for principle amount of notes, 10% for annual rate of interest and 60 as number of days.

Interest=[$2,100×10%×60365]=$35

Nov 5 received payment of principal plus interest from M for the August 7 note.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Nov 5 Cash   7,636  
  Note Receivable (M)     7,450
  …..Interest Revenue     186
  (Being honor of note receivable is recorded )      

Table (11)

• Since, the honor of note receivable on maturity date will increase the amount of cash and cash is an asset account. It is debited when it is increased.

• Since, the honor of note receivable by a customer will decrease the amount of note receivable and note receivable is an asset account. It is credited when it is decreased.

• Since, interest on note receivable is revenue for the company which belongs to the revenue account. It is credited when it is increased.

Working note:

Formula to calculate interest on note receivable is:

Interest=[(Principleamountofnotes)×(Annualrateofinterest)×(Numberofdays365)]

Substitute $7,450 for principle amount of notes, 10% for annual rate of interest and 90 as number of days,

Interest=[$7,450×10%×90365]=$186

Dec 1 wrote off the A.P account against the allowance for doubtful accounts.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
Dec 1 Allowance for Doubtful Account   2,414  
  Accounts Receivable (A.P)     2,414
  (Being write off of uncollectible accounts receivable is recorded)      

Table (11)

• Since, in allowance method of accounting for accounts receivable the amount for bad debt expense is deducted from allowance for doubtful account which is a contra asset account, it is debited when it s decreased.

• Since, in allowance method of accounting for accounts receivable the deduction is made against the account receivable account which is an asset account, it is credited when it s decreased.

2.

To explain: The type of reporting that is necessary when a business pledges receivables as security for a loan and the loan is still outstanding at the end of the period.

1.

Expert Solution
Check Mark

Explanation of Solution

• The reporting can be provided as the footnote at the end of financial statement when a business pledges receivables as security for a loan and the loan is still outstanding at the end of the period.

• Since footnote refers to the ending note which is represented at the end of a financial statement which shows the details of a transaction which does not have any monetary impact on the company and cannot be recorded in the any of the financial statement but which is important for the users for financial statements and the given transaction is of same nature, it is provided as footnote at the end of a financial statement.

Thus, the reporting of given transaction will be provided as the footnote at the end of the financial statement.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 7 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
7.2 Ch 7: Notes Payable and Interest, Revenue recognition explained; Author: Accounting Prof - making it easy, The finance storyteller;https://www.youtube.com/watch?v=wMC3wCdPnRg;License: Standard YouTube License, CC-BY