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Chapter 7: Question: P7 (page 373)

(Notes Receivable with Realistic Interest Rate) On October 1, 2017, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden鈥檚 financial statements are prepared on a calendar-year basis.

Instructions

Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.

Short Answer

Expert verified

The interest of$2,400 for three months from October to December will accrue for each period.

Step by step solution

01

Definition of Note Receivable

A written promise made by a customer to repay the amount of money after a specified period along with interest charged in respect of the credit purchase made is known as note receivable

02

Journal Entries for Note

Date

Accounts and Explanation

Debit $

Credit $

1 Oct 2017

Note receivable

$120,000

Sales revenue

$120,000

31 Dec 2017

Interest receivable

$2,400

Interest revenue

$2,400

1 Oct 2018

Cash

$9,600

Interest receivable

$2,400

Interest revenue

$7,200

31 Dec 2018

Interest receivable

$2,400

Interest revenue

$2,400

1 Oct 2019

Cash

$129,600

Interest receivable

$2,400

Interest revenue

120,000脳8%脳912

$7,200

Note receivable

$120,000

Working note:

A. Accrued interest for 31 Dec each year.Interest=Principal脳Interestrate脳NumberofMonths12=$120,000脳8%脳312=$2,400

B. Interest earned for 1 Oct each year.

Interest=Principal脳Rateofinterest脳Numberofmonths12=$120,000脳8%脳912=$7,200

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Most popular questions from this chapter

(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.

1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt鈥檚 books at a cost of \(590,000.

2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).

Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.

Explain how accounting for bad debts can be used for earnings management.

(Analysis of Receivables) Presented below is information for Jones Company.

1. Beginning-of-the-year Accounts Receivable balance was \(15,000.

2. Net sales (all on account) for the year were \)100,000. Jones does not offer cash discounts.

3. Collections on accounts receivable during the year were $70,000.

Instructions

(a) Prepare (summary) journal entries to record the items noted above.

(b) Compute Jones鈥檚 accounts receivable turnover and days to collect receivables for the year. The company does not believe it will have any bad debts.

(c) Use the turnover ratio computed in (b) to analyze Jones鈥檚 liquidity. The turnover ratio last year was 6.0

Roeher Company sold \(9,000 of its specialty shelving to Elkins Office Supply Co. on account. Prepare the entries when (a) Roeher makes the sale, (b) Roeher grants an allowance of \)700 when some of the shelving does not meet exact specifications but still could be sold by Elkins, and (c) at year-end; Roeher estimates that an additional $200 in allowances will be granted to Elkins.

(Bank Reconciliation and Adjusting Entries) Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.

June 30 Bank Reconciliation Statement

Balance per bank

\(7,000

Add: Deposit in transit

1,540

Less: Outstanding checks

(2,000)

Balance per books

\)6,540

Month of July Results

Per Bank

Per Books

Balance July 31

\(8,650

\)9,250

July Deposits

5,000

5,810

July Checks

4,000

3,100

July note collected (not included in July deposits)

1,000

-

July bank service charge

15

-

July NSF check from a customer, returned by the bank (recorded by bank as a charge)

335

-

Instructions

(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.

(b) Prepare the general journal entry or entries to correct the Cash account.

Answer
See all solutions

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