Explanation 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. The explanation for the transaction is as follows: 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. Working note 1: Calculate the amount of interest revenue for the month of May 17: Interest revenue= [ Face amount × Annual interest rate × Time in terms of year ] = [ $28,000 × 6 % 100 × 60 days 360 days ] = $ 280 Working note 2: Calculate the amount of sales for the month of June 15: Sales = Gross sales − 1 % Discount =$17,700 − ( $17,700 × 1

15th Edition

ISBN: 9781337902663

Author: WARREN, Carl S.

Publisher: Cengage Learning,

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Financial Transaction Analysis

The transaction analysis is done with the help of the accounting equation. The basic accounting equation is alternatively known as the balance sheet equation is based on the double-entry system which says that for each transaction happening in a business…

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