Question

The following are transactions related to notes receivable. In all cases, interest is due at maturity unless indicated otherwise.

Jan    1     Loaned $40,000 to the company’s general manager, who signed a 6-month, 7% note               due June 30.

Feb    1     A customer who owed $6,500 settled his account by signing a 3-month, 3% note.

Mar 31     Recorded accrued interest on all notes in preparation for issue of quarterly financial ....             statements.

Apr 30     The customer referred to above defaulted on the note. It is unlikely that he will be able              to pay the account.

Jun 30     The general manager paid her note in full.

Instructions

Record all of the transactions described.

Answer 1

Answer is as follows:

Jan 1 Notes Receivable A/C Dr $40000

To Cash A/C $40000

Feb 1 Notes Receivable A/C Dr $6500

To Accounts Receivable A/C $6500

Mar 31 Interest Receivable A/C Dr $732.50

To Interest Revenue A/C $732.50

($40000*7%*3/12)+($6500*3%*2/12)

Apr 30 1. Allowance for doubtful accounts A/C Dr $6500

To Notes Receivable A/C $6500

2. Interest revenue A/C Dr $32.50

To Interest Receivable A/C $32.50 ($6500*3%*2/12) No interest revenue is recognised because it will never be received, as on mar 31 interest revenue is recognised we have to reverse that entry.

June 30 Cash A/C Dr   $41400

To Notes Receivable A/C $40000

To Interest Receivable A/C $700 ($40000*7%*3/12)

To Interest Revenue A/C   $700  ($40000*7%*3/12)