Question

On June 1, 2018, Alpha Company provided services to Bicycle Company and received a 1-year, 8%, $150,000 note, due May 31, 2019. Interest is payable at maturity. Alpha records adjusting entries annually at December 31.

a. Compute the total interest on the note. How much interest revenue will be recognized in 2018? In 2019?

b. Record the June 1, 2018, journal entry for Alpha.

c. Record the December 31, 2018, adjusting journal entry for Alpha.

d. Alpha’s 2018 preliminary net income of $100,000 was computed without including any amounts related to the receipt of the note or the 12-31-18 adjusting entry. Determine the correct amount of 2018 net income. Ignore taxes.

e. On Alpha’s December 31, 2017, balance sheet, retained earnings was reported at $300,000. In 2018, the company paid $40,000 in dividends. What is the December 31, 2018, retained earnings balance?

f. What amount(s) will Alpha report on the December 31, 2018, balance sheet related to the note? How will these amounts be classified?

e. Record the May 31, 2019, journal entry for Alpha for the receipt of principal and interest.

Answer 1

a) Total interest on Note = 150000*8% = $12000

Interest revenuen recognized in 2018 = 12000*7/12 = $7000

b) Journal entry :

Date	account and explanation	debit	credit
June 1	Notes receivable	150000
	Service revenue		150000

c) Adjusting entry :

Date	account and explanation	debit	credit
Dec 31	Interest receivable	7000
	Interest revenue		7000

d) Net income = 100000+7000 = $107000

e) December 31,2018 Retained earnings = 300000+107000-40000 = $367000

f) Notes receivable $150000 under current assets; Interest receivable $7000 under current assets

g) Journal entry :

Date	account and explanation	debit	credit
May 31	Cash	162000
	Notes receivable		150000
	Interest receivable		7000
	Interest revenue		5000