Q39PGB - Horngren'S Financial And Managerial Accounting

Question

Accounting for notes receivable and accruing interestLogan Realty loaned money and received the following notes during 2018.Note Date Principal Amount Interest Rate Term

(1) Oct. 1 $ 16,000 7% 1 year

(2) Jun. 30 18,000 18% 9 months

(3) Sep. 19 12,000 8% 90 days

Requirements

1. Determine the maturity date and maturity value of each note.

2. Journalize the entries to establish each Note Receivable and to record collection ofprincipal and interest at maturity. Include a single adjusting entry on December 31,2018, the fiscal year-end, to record accrued interest revenue on any applicable note.Explanations are not required. Round to the nearest dollar. 

Step-by-Step Solution

Answer

1. The maturity date:

Note 1: March 31, 2019

Note 2: March 31, 2019

Note 3: December 18, 208

2. The cash account is debited with $237, and the interest receivable account is credited with $237.

Step 1: Definition of the maturity date

A note’s maturity date is when a note becomes due. On the maturity date, the amount of the notes receivable is received by a company.

Step 2: Maturity date and maturity value

Note	Date	Principal	Time	Maturity date	Year	Value
1	April 1	$16,000	One year	31 March	2019	$17,120
2	September 30	$18,000	Nine months	31 March	2019	$20,430
3	September 19	$12,000	90 days	18 December	2018	$12,237

 

Note 1:

$\begin{array}{c}\text{Interest=\hspace{0.17em}Principal×Interest×Time}\\ \text{=\hspace{0.33em}\$16,000×\hspace{0.17em}7\%×1}\\ \text{=\hspace{0.33em}\$1,120.}\end{array}$

Note 2:

$\begin{array}{c}\text{Interest=\hspace{0.17em}Principal×Interest×Time}\\ \text{=\hspace{0.33em}}\frac{\$18,000\times 18\%\times 9}{12}\\ \text{=\hspace{0.33em}\$2,430.}\end{array}$

Note 3:

$\begin{array}{c}\text{Interest=\hspace{0.17em}Principal×Interest×Time}\\ \text{=\hspace{0.33em}}\frac{\$12,000\times 8\%\times 90}{365}\\ \text{=\hspace{0.33em}\$237.}\end{array}$

Step 3: Journal entries

Date	Particulars	Debit	Credit
April 1, 2018	Notes Receivable	$16,000
	Cash		$16,000
	(Being entry for notes receivable)
September 30, 2018	Notes Receivable	$18,000
	Cash		$18,000
	(Being entry for notes receivable)
September 19, 2018	Notes Receivable	$12,000
	Cash		$12,000
	(Being entry for notes receivable)
December 18, 2018	Cash	$12,000
	Notes Receivable		$12,000
	(Being notes receivable is collected on maturity)
December 18, 2018	Interest Receivable	$237
	Interest Accrued		$237
	(Being interest accrues)
December 18, 2018	Cash	$237
	Interest Receivable		$237
December 31, 2018	Interest Receivable	$1,712
	Interest Revenue		$1,712
	(Being interest revenue recognised)