Q23E - Horngren'S Financial And Managerial Accounting

Question

Question: 

Journalizing note receivable transactions including a dishonored note

On September 30, 2018, Team Bank loaned $94,000 to Kendall Warner on a one-year, 6% note. Team’s fiscal year ends on December 31.

Requirements

1. Journalize all entries for Team Bank related to the note for 2018 and 2019.

2. Which party has a

a. note receivable?

b. note payable?

c. interest revenue?

d. interest expense?

3. Suppose that Kendall Warner defaulted on the note. What entry would the Team record for the dishonored note?

Step-by-Step Solution

Answer

Answer:

1. Journal entries are recorded in Step 1.
2. a. note receivable - Team Bank 

2b. note payable- Kendall Warner

2c. interest revenue- Team Bank

2d. interest expense - Kendall Warner

Journal entry is recorded in Step 4.

Step 1: Journal entries

Date	Particulars	Debit	Credit
September 30	Notes Receivables- Kendall Warner	$94,000
	Cash		$94,000
	(Sold goods on account)
December 31	Interest Receivable	$1,410
	Interest Revenue ($94,000 x6%x3/12)		$1,410
	(Accrued interest revenue)
2019
September 30	Cash	$99,640
	Notes Receivable- Kendall Warner		$94,000
	Interest Receivable		$1,410
	Interest Revenue ($94,000 x6%x9/12)		$4,230
	(Collected note receivable on maturity)

Step 3: Party Details

Party borrowing the money record the notes as notes payable, however party providing the funds record it as accounts receivable. Borrower records interest payable and lender records interest receivable.

Step 4: Entry for the default of the loan

Date	Particulars	Debit	Credit
September 30	Accounts Receivable- Kendall Warner	$99,640
	Notes Receivable- Kendall Warner		$94,000
	Interest Receivable		$1,410
	Interest Revenue		$4,230
	(Note was dishonored)