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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

(Bad-Debt Reporting) Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.

Instructions

(a) In a recessionary environment with tight credit and high interest rates:

(1) Identify steps Marvin Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identified in terms of the risks and costs involved.

(b) Should the controller be concerned with Marvin Company鈥檚 growth rate in estimating the allowance? Explain your answer.

(c) Does the president鈥檚 request pose an ethical dilemma for the controller? Give your reasons.

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

Debit

Credit

Accounts receivables

\(100,000

Allowance for doubtful accounts

\)2,000

Sales revenue (All on credit)

900,000

Sales return and allowance

50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

What may be included under the heading of 鈥渃ash鈥�?

In what accounts should the following items be classified? (a) Coins and currency. (b) U.S. Treasury (government) bonds. (c) Certificate of deposit (matures in 5 months). (d) Cash in a bank that is in receivership. (e) NSF check (returned with bank statement). (f) Deposit in foreign bank (exchangeability limited). (g) Postdated checks. (h) Cash to be used for retirement of long-term bonds. (i) Deposits in transit. (j) 100 shares of HP stock (intention is to sell in one year or less). (k) Savings and checking accounts. (l) Petty cash. (m) Stamps. (n) Travel advances.

(Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances.

Debit

Credit

Accounts receivables

\(82,000

Allowance for doubtful accounts

\)2,120

Sales revenue

\(430,000

Instructions

Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)

1. To obtain additional cash, Collins factors without recourse \)25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.

2. To obtain a 1-year loan of \(55,000, Collins pledges \)65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.

3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.

4. Based on an aging analysis, an allowance of \(5,800 should be reported. Assume the allowance has a credit balance of \)1,100.
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