Question

chapter 8 - 1

notes receivable

In the trial balance for March, you see that Notes Receivable-Fast Feet Co. has a negative balance of $135, which would seem to indicate that Fast Feet paid too much. Looking back through the journal entries for March, you find that on March 19 the accounting intern recorded receipt of $4,635 in payment of this note receivable. Further investigation reveals that on November 19, 20Y7, this note receivable was received from Fast Feet Co. for $4,500. You can find no additional information about this note in the accounting records. Assume a 360 day year.

Using the preceding information, compute the term and the interest rate of the note receivable from Fast Feet.

1. Term of the note: _____days

2. Interest rate of the note: ______ %

3. Journalize the entry needed to record information about the note receivable from Fast Feet for the year 20Y7. Assume that the entry on November 19, 20Y7 is correct. Refer to the Chart of Accounts of exact wording of account titles. Round all amounts to the nearest dollar.

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2

4. Journalize the entry needed to record collection of the note at maturity on March 19, 20Y8. Assume that the entry on November 19, 20Y7 is correct. Refer to the Chart of Accounts of exact wording of account titles. Round all amounts to the nearest dollar.

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4

Answer 1

• All working forms part of the answer
• Working

A	Notes receivable amount	$4500
B	Amount received	$4635
C=B-A	Interest on Notes receivables	$135
D=C/A	Interest rate	3%
E	Term of Notes receivables	19 Nov to 19 March = 4 month = 120 days
F=Cx 12/E	Annual Interest rate	[3% x 12 month/4months] 9%

• Requirement 1: Term of the note = From 19 Nov 2017 to 19 Mar 2018 = 120 days
• Requirement 2 = Interest Rate [as calculated above] = 9%
• Requirement 3: Journal Entry on last day of 2017

Date	Accounts Title	Dr (in $)	Cr (in $)
31-Dec-17	Interest receivable	47.25
	Interest Revenue		47.25

Note: days from 19 Nov 2017 to 31 Dec 2017 = 11 days (Nov) + 31 days (dec) = 42 days
Interest revenue = 4500 x 9% x 42/360 = $47.25

• Requirement 4: Entry on Maturity Date

Date	Accounts Title	Dr (in $)	Cr (in $)
19-Mar-18	Cash	4635
	Interest Revenue		87.75
	Notes receivables		4500
	Interest receivables		47.25

Note: remaining days in 2018 till 19 March = 120 days – 42 days of 2017 = 78 days
Interest Revenue for 2018 = 4500 x 9% x 78/360 days = $87.75