Question

On September 1, 2017, Metlock, Inc. sold goods to Sarasota Corp., a new customer. Before shipping the goods, Metlock’s credit and collections department conducted a procedural credit check and determined that Sarasota is a high-credit-risk customer. As a result, Metlock did not provide Sarasota with open credit by recording the sale as an account receivable. Instead, Metlock required Sarasota to provide a non–interest-bearing promissory note for $34,400 face value, to be repaid in one year. Sarasota has a credit rating that requires it to pay 12% interest on borrowed funds. Metlock pays 10% interest on a loan recently obtained from its local bank. Metlock has a December 31 year end. The tables in this problem are to be used as a reference for this problem.

a) Prepare the entries required on Metlock’s books to record the sale, annual adjusting entry, and collection of the full face value of the note. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.)

b) Assume that on the note’s maturity date, Sarasota informs Metlock that it is having cash flow problems and can only pay Metlock 81% of the note’s face value. After extensive discussions with Sarasota’s management, Metlock’s credit and collections department considers the remaining balance of the note uncollectible. Prepare the entry required on Metlock’s books on the note’s maturity date. (Assume the interest has not been recorded at September 1, 2018.) (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

a) On September 1 entry shall be,

Dr Promisory Note Receivable 34400

Cr Sales 34400

(being promisory note of amount to be repaid in one year receive from Sarasota Corp as against sale)

b) On maturity entry shall be

Dr. Bank (34400*81%) 27864

Dr. note uncollectible (34400*18%) 6536

Cr Promisory Note receivable 34400

(being note received againt sale to Sarasota Corp)

In this case the genereal credit policy for sales of Metlock is to be considered to calculate interest cost due to this transaction, as the promisory note is non interest bearing interest cost on partial payment is not considered)