Q25E - Horngren'S Financial And Managerial Accounting

Question

Professional Steam Cleaning performs services on account. When a customer account becomes four months old, Professional converts the account to a note receivable. During 2018, the company completed the following transactions:

 

2018
Apr.28	Performed service on account for Parkview Club, \(18,000.
Sep. 1	Received an \)18,000, 60-day, 12% note from Parkview Club in satisfaction of its past-due account receivable.
Oct. 31	Collected the Parkview Club note at maturity

Record the transactions in Professional’s journal. Round to the nearest dollar.

Step-by-Step Solution

Answer

Journal entries are recorded in step 2.

Step1: Calculation of interest amount

Interest amount is calculated as follows:  

 $\begin{array}{c}\text{Interest Amount}=\text{Notes receivable}\times \text{Interest rate}\times \text{Fraction of Year}\\ =\mathrm{\$}18,000\times 12\mathrm{\%}\times \frac{60}{365}\\ =\mathrm{\$}355\end{array}$

Step2: Journal entries

Date	Account and explanation	Debit	Credit
Apr.28	Accounts Receivable - Parkview club	$ 18,000
	Service Revenue		$ 18,000
	(To record services revenue earned)
Sept 1	Notes Receivable - Parkview club	$ 18,000
	Accounts Receivable - Parkview club		$ 18,000
	(To record note issued against accounts receivable)
Oct.31	Cash	$18,355
	Notes Receivable- Parkview club		$18,000
	Interest Revenue		$355
	(To record collection of note with interest)