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Chapter 8: Problem 19

Journalize the following transactions of Prairie Theater Productions: July 8. Received a \(\$ 30,000,90\)-day, \(8 \%\) note dated July 8 from Pennington Company on account. Oct. 6. The note is dishonored by Pennington Company. Nov. 5. Received the amount due on the dishonored note plus interest for 30 days at \(10 \%\) on the total amount charged to Pennington Company on October \(6 .\)

Short Answer

Expert verified
July 8: Debit Notes Receivable $30,000; Credit Accounts Receivable $30,000. Oct 6: Debit Accounts Receivable $30,600; Credit Notes Receivable $30,000 and Interest Revenue $600. Nov 5: Debit Cash $30,851.37; Credit Accounts Receivable $30,600 and Interest Revenue $251.37.

Step by step solution

01

Record the Initial Transaction

On July 8, Prairie Theater Productions receives a 90-day note of $30,000 at 8% interest from Pennington Company on account. The journal entry for this transaction involves debiting 'Notes Receivable' for $30,000 and crediting 'Accounts Receivable - Pennington Company' for $30,000 to reflect the conversion of an outstanding account receivable to a note receivable.
02

Record the Dishonored Note

On October 6, the note by Pennington Company is dishonored. This means the note was not paid by the due date. To record this, you need to transfer the note amount back to Accounts Receivable, along with the interest it accrued over 90 days. The interest is calculated as follows: Interest = Principal 脳 Rate 脳 Time = $30,000 脳 0.08 脳 (90/365) = $600. Therefore, debit 'Accounts Receivable - Pennington Company' for $30,600 and credit 'Notes Receivable' for $30,000 and 'Interest Revenue' for $600.
03

Record the Cash Receipt with Additional Interest

On November 5, Prairie Theater Productions receives payment for the dishonored note amount including additional 30 days of interest at 10%. First, calculate the additional interest: Additional Interest = (Total Amount on October 6) 脳 Rate 脳 Time = $30,600 脳 0.10 脳 (30/365) = $251.37 (rounded to $251.37). The entry will debit 'Cash' for $30,851.37, credit 'Accounts Receivable - Pennington Company' for $30,600, and credit 'Interest Revenue' for the additional interest of $251.37.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Notes Receivable
When a business agrees to accept a formal, written promise to receive a sum of money at a future date, this is known as "Notes Receivable." This usually occurs when a customer is unable to pay their invoice immediately and instead provides a promissory note. Here's the process explained simply:
  • A Notes Receivable is an asset because it represents money that will be paid to your company.
  • The terms of a note typically include a principal amount, interest rate, and maturity date.
  • In accounting, when a note is issued, the bookkeeper moves the amount due from an open "Accounts Receivable" to "Notes Receivable." This reflects the change from an immediate payment expectation to a delayed, yet formalized, payment promise.
For example, in the given exercise, Prairie Theater Productions converted $30,000 from the Pennington Company on account to a notes receivable, formalizing the debt with an added interest expectation.
Interest Calculation Simplified
Interest calculation is crucial in dealing with notes receivable and other financial activities. The interest represents the charge for borrowing money, calculated on the principal sum due based on a specified rate and time. Here's a straightforward formula to compute interest:Let's break down the formula:
  • **Principal** is the initial amount of money borrowed or invested (e.g., \(30,000).
  • **Rate** is the percentage of the principal charged as interest, often annually (e.g., 8% or 0.08).
  • **Time** indicates how long the money is borrowed for, expressed in years or a fraction of a year (e.g., 90/365 for days, given in the exercise).
The formula for calculating interest is:\[\text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time}\]In the first scenario of the exercise, \)30,000 at 8% interest over 90 days results in $600 interest. This indicates how much Prairie Theater Productions earns simply by allowing Pennington Company to defer payment.
Clarifying Accounts Receivable
Accounts Receivable is an accounting term identifying money still owed to a company by its customers. These funds are typically for goods or services that have been delivered but not paid for upfront. Key points to remember:
  • It is considered a current asset because it is expected to be converted into cash usually within a year.
  • Managing accounts receivable is crucial for maintaining cash flow and ensuring company liquidity.
  • There can be a transfer between accounts receivable and notes receivable as seen in cases where terms change, such as with Prairie Theater Productions.
In our exercise, the Accounts Receivable initially owed by Pennington Company was converted to a Notes Receivable. However, upon failure to pay by the note's maturity, it reverted back to Accounts Receivable, demonstrating flexibility in managing customer dues and ensuring the company keeps track of what is owed at all times.

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Most popular questions from this chapter

Kubota Co. is a wholesaler of office supplies. An aging of the company's accounts receivable on December 31,2006 , and a historical analysis of the percentage of uncollectible accounts in each age category are as follows: \begin{tabular}{lrc} Age Interval & Balance & Percent Uncollectible \\ \cline { 2 - 3 } Not past due & \(\$ 450,000\) & \(2 \%\) \\ 1-30 days past due & 110,000 & 4 \\ \(31-60\) days past due & 51,000 & 6 \\ \(61-90\) days past due & 12,500 & 20 \\ \(91-180\) days past due & 7,500 & 60 \\ Over 180 days past due & \(\frac{5,500}{\$ 636,500}\) & 80 \\ & \(\underline{\hline}\) \end{tabular} Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31,2006 .

At the end of the current year, the accounts receivable account has a debit balance of \(\$ 840,000\), and net sales for the year total \(\$ 7,150,000\). Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions: a. The allowance account before adjustment has a credit balance of \(\$ 1,780\). Uncollectible accounts expense is estimated at \(1 / 4\) of \(1 \%\) of net sales. b. The allowance account before adjustment has a credit balance of \(\$ 2,750\). An aging of the accounts in the customer's ledger indicates estimated doubtful accounts of \(\$ 16,350\). c. The allowance account before adjustment has a debit balance of \(\$ 3,050\). Uncollectible accounts expense is estimated at \(1 / 2\) of \(1 \%\) of net sales. d. The allowance account before adjustment has a debit balance of \(\$ 3,050\). An aging of the accounts in the customer's ledger indicates estimated doubtful accounts of \(\$ 38,400\).

Anchor.com, a computer consulting firm, has decided to write off the \(\$ 7,130\) balance of an account owed by a customer. Journalize the entry to record the writeoff, (a) assuming that the allowance method is used, and (b) assuming that the direct write-off method is used.

Fridley Company sells carpeting. Over \(50 \%\) of all carpet sales are on credit. The following procedures are used by Fridley to process this large number of credit sales and the subsequent collections. a. A formal ledger is not maintained for customers who sign promissory notes. Fridley simply keeps a copy of each signed note in a file cabinet. These unpaid notes are filed by due date. b. Fridley employs an accounts receivable clerk. The clerk is responsible for recording customer credit sales (based on sales tickets), receiving cash from customers, giving customers credit for their payments, and handling all customer billing complaints. c. The general ledger control account for Accounts Receivable is maintained by the General Accounting Department at Fridley. This department records total credit sales, based on credit sale information from the store's electronic cash register, and total customer receipts, based on the bank deposit slip. d. All credit sales to a first-time customer must be approved by the Credit Department. Salespersons will assist the customer in filling out a credit application, but an employee in the Credit Department is responsible for verifying employment and checking the customer's credit history before granting credit. e. Fridley's standard credit period is 45 days. The Credit Department may approve an extension of this repayment period of up to one year. Whenever an extension is granted, the customer signs a promissory note. Up to \(15 \%\) of the credit sales in any one year are for repayment periods exceeding 45 days. State whether each of these procedures is appropriate or inappropriate, considering the principles of internal control. If inappropriate, state which internal control procedure is violated.

Theisen Co., a building construction company, holds a 90 -day, \(6 \%\) note for \(\$ 20,000\), dated March 15, which was received from a customer on account. On April 14, the note is discounted at the bank at the rate of \(8 \%\). a. Determine the maturity value of the note. b. Determine the number of days in the discount period. c. Determine the amount of the discount. Round to the nearest dollar. d. Determine the amount of the proceeds. e. Journalize the entry to record the discounting of the note on April 14 .
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