Question

On October 1, 2017, Blue Spruce Corp., a farm equipment dealer, sold a harvesting machine to Coronado Industries. Instead of a cash payment, Coronado Industries gave Blue a $121,000, two-year, 10% note; 10% is a realistic rate for a note of this type. The note required interest to be paid annually on October 1, beginning October 1, 2018. Blue’s financial statements are prepared on a calendar-year basis.

a)Repeat the journal entries under the assumption that Blue Spruce Corp. uses reversing entries.

Answer 1

a)Repeat the journal entries under the assumption that Blue Spruce Corp. uses reversing entries;

Date	Accounts Title & Explanation	Debit	Credit
2017
Dec. 31	Interest Receivable	$3025
	Interest Income		$3025
	(Adjusting entry for recording interest income on Notes receivable)
2018
Oct. 1	Interest Income	$3025
	Interest Receivable		$3025
	(To reverse prior year interest receivable)
Oct. 1	Cash	$12100
	Interest Income		$12100
	(To record receipts of interest income)

Working Note;

1. Interest receivable on December 31, 2017 will be calculated as follow;

($121000 * 0.10 * 3 / 12) = $3025

2. Interest revenue on October 1, 2018 will be calculated as follow;

($121000 * 0.10) = $12100