Question

During 2016, Thomas Company entered into two transactions involving promissory notes and properly recorded each transaction.

1.

On November 1, 2016, it purchased land at a cost of $8,000. It made a $2,000 down payment and signed a note payable agreeing to pay the $6,000 balance in 6 months plus interest at an annual rate of 10%.

2. On December 1, 2016, it accepted a $4,200, 3-month, 12% (annual interest rate) note receivable from a customer for the sale of merchandise. On December 31, 2016, Thomas made the following related adjustments:

Dec 31 Interest Expense 100

Interest Payable            100

Dec 31 Interest Receivable 42

Interest Revenue           42

Required:

	1. Assuming that Thomas uses reversing entries, prepare journal entries to record:
	a. the January 1, 2017, reversing entries
	b. the March 1, 2017, $4,326 collection of the note receivable
	c. the May 1, 2017, $6,300 payment of the note payable
	2. Assuming instead that Thomas does not use reversing entries, prepare journal entries to record the collection of the note receivable and the payment of the note payable.

Answer 1

1a) Reversing Journal Entries

Date	Account Titles	Debit	Credit
Jan-1	Interest Payable	100
	Interest Expense		100
Jan-1	Interest Revenue	42
	Interest Receivable		42

1b)

Date	Account Titles	Debit	Credit
Mar-01	Cash	4326
	Note Receivable		4200
	Interest Revenue		126

1c)

Date	Account Titles	Debit	Credit
May-01	Note Payable	6000
	Interest Expense	300
	Cash		6300

2.

Date	Account Titles	Debit	Credit
Mar-01	Cash	4326
	Notes Receivable		4200
	Interest Receivable		42
	Interest Revenue (326-42)		284

Date	Account Titles	Debit	Credit
May-01	Note Payable	6000
	Interest Payable	100
	Interest Expense	200
	Cash		6300