Question

Selkirk Company obtained a $18,000 note receivable from a customer on January 1, 2018. The note,...

Selkirk Company obtained a $18,000 note receivable from a customer on January 1, 2018. The note, along with interest at 10%, is due on July 1, 2018. On February 28, 2018, Selkirk discounted the note at Unionville Bank. The bank’s discount rate is 12%.

Required:
Prepare the journal entries required on February 28, 2018, to accrue interest and to record the discounting for Selkirk. Assume that the discounting is accounted for as a sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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Answer #1

SOLUTION

Journal entries-

Date Accounts titles and Explanation Debit ($) Credit ($)
February 28, 2018 Interest receivable 300
Interest revenue (18,000*10%*2/12) 300
(To record accrued interest)
February 28, 2018 Cash 18,180
Loss on sale of note receivable 120
Notes receivable 18,000
Interest receivable 300
(To record the discounting of note receivable)

Discounting of notes receivable-

Interest = 18,000*10% *6/12 = 900

Maturity value = 18,000 + 900 = 18,900

Discount = 18,000 * 12% * 4/12 = $720

Cash proceeds = Maturity value - Discount

= 18,900 - 720 = 18,180

Loss on sale of investment = Face value of note receivable + Interest receivable - Cash proceeds

= 18,000 + 300 - 18,180 = 120

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