Midtown Distribution sells a variety of merchandise to
retail stores on account, but it insists that any customer who
fails to pay an invoice when due must replace their account
receivable with an interest-bearing note. The company adjusts and
closes its accounts at December 31. Among the transactions relating
to notes receivable were the following.
Nov. 1 Received from a customer (Sampson Co.) a 9-month, 12 percent
note for $30,000 in settlement of an account receivable due
today.
Aug. 1 Collected in full the 9-month, 12 percent note receivable
from Sampson Co., including interest.
Instructions
a. Prepare journal entries (in general journal form) to record: (1)
the receipt of the note on November 1; (2) the adjustment for
interest on December 31; and (3) the collection of principal and
interest on August 1. (To better illustrate the allocation of
interest revenue between accounting periods, we will assume Midtown
makes adjusting entries only at year-end.)
b. Assume that instead of paying the note on August 1, the customer
(Sampson Co.) had defaulted. Give the journal entry by Midtown to
record the default. Assume that Sampson Co. has sufficient
resources that the note eventually will be collected.
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