91Ó°ÊÓ

Journal Entries for Accounts and Notes Receivable Austin, Inc., began business on January \(1 .\) Several transactions for the year follow: May 2 Received a \(\$ 30,000,60\) day, ten percent note on account from the Haskins Company. July 1 Received payment from Haskins for its note plus interest. 1 Received a \(\$ 61,000,120\) day, nine percent note from \(\mathrm{R}\). Longo Company on account. Oct. 29 R. Longo failed to pay its note. Dec. 9 Wrote off R. Longo's account as uncollectible. Austin, Inc., uses the allowance method of providing for credit losses. 11 Received a \(\$ 42,000,90\) day, 12 percent note from R. Canal on account. 31 Recorded expected credit losses for the year by an adjusting entry. Accounts written off during this first year have created a debit balance in the Allowance for Doubtful Accounts of \(\$ 61,000\). An analysis of aged accounts receivables indicates that the desired balance of the allowance account should be \(\$ 13,200\). 31 Made the appropriate adjusting entries for interest. Required Record the foregoing transactions and adjustments in general journal form.

Step by step solution

01

Record May 2 Transaction for Haskins Company Note

Austin, Inc. received a 60-day, 10% note for $30,000 from Haskins Company on account. This transaction is recorded by debiting Notes Receivable for $30,000 and crediting Accounts Receivable - Haskins Company for $30,000. **Journal Entry:** ``` Date Account Title Debit Credit May 2 Notes Receivable - Haskins 30,000 Accounts Receivable 30,000 ```

02

Record July 1 Payment Received from Haskins

On July 1, Austin, Inc. received payment from Haskins for the note plus interest. Interest can be calculated using the formula \[\text{Interest} = \text{Principal} \times \text{Rate} \times \frac{\text{Time}}{360}\]or\[\text{Interest} = 30000 \times 0.10 \times \frac{60}{360} = 500\]Thus, Austin, Inc. receives \(30,500. This is recorded by debiting Cash for \)30,500, crediting Notes Receivable for \(30,000, and crediting Interest Revenue for \)500.**Journal Entry:**```Date Account Title Debit CreditJuly 1 Cash 30,500 Notes Receivable - Haskins 30,000 Interest Revenue 500```

03

Record July 1 Note from R. Longo Company

Received a 120-day, 9% note for $61,000 from R. Longo Company on account. This transaction involves increasing Notes Receivable by $61,000 and decreasing Accounts Receivable for the same company by $61,000. **Journal Entry:** ``` Date Account Title Debit Credit July 1 Notes Receivable - R. Longo 61,000 Accounts Receivable - R. Longo 61,000 ```

04

Record October 29 Default by R. Longo

On October 29, R. Longo failed to pay its note. The value of the note should be re-entered in Accounts Receivable and written off against Notes Receivable. **Journal Entry:** ``` Date Account Title Debit Credit Oct. 29 Accounts Receivable - R. Longo 61,000 Notes Receivable - R. Longo 61,000 ```

05

Record December 9 Write Off of R. Longo's Account

On December 9, R. Longo's account is determined to be uncollectible and is written off. This method involves debiting Allowance for Doubtful Accounts and crediting Accounts Receivable. **Journal Entry:** ``` Date Account Title Debit Credit Dec. 9 Allowance for Doubtful Accounts 61,000 Accounts Receivable - R. Longo 61,000 ```

06

Record December 11 Note from R. Canal

Received a 90-day, 12% note for $42,000 from R. Canal on account. This transaction is recorded by debiting Notes Receivable and crediting Accounts Receivable - R. Canal. **Journal Entry:** ``` Date Account Title Debit Credit Dec. 11 Notes Receivable - R. Canal 42,000 Accounts Receivable - R. Canal 42,000 ```

07

Record December 31 Adjusting Entry for Bad Debts

An analysis revealed a necessary Allowance for Doubtful Accounts balance of $13,200. The current balance has a $61,000 debit, indicating a pre-adjustment balance of -$61,000 toward desired credit balance. The adjusting entry is calculated as $13,200 - (-$61,000) = $74,200. **Journal Entry:** ``` Date Account Title Debit Credit Dec. 31 Bad Debt Expense 74,200 Allowance for Doubtful Accounts 74,200 ```

08

Record December 31 Adjusting Entries for Interest

Adjust for interest revenue not recorded yet. Interest on R. Longo's note never collected: \[\text{Interest} = 61000 \times 0.09 \times \frac{120}{360} = 1,830 \]Interest on R. Canal's note as of December 31, assuming 20 days of accrued interest:\[\text{Interest} = 42000 \times 0.12 \times \frac{20}{360} = 280 \]**Journal Entry for accrued interest on R. Canal's Note:**```Date Account Title Debit CreditDec. 31 Interest Receivable - R. Canal 280 Interest Revenue 280```

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Key Concepts

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

Accounts Receivable

Accounts Receivable represents the amount that customers owe your business for goods or services purchased on credit. This is a current asset on the balance sheet and is a vital part of a business's liquidity.

Recording transactions under Accounts Receivable involves recognizing sales made on credit. For example, when Austin, Inc. records a transaction involving a note from Haskins Company, the action transfers the owed amount under Notes Receivable, decreasing the Accounts Receivable. However, when a note defaults, like with R. Longo, the balance is moved back to Accounts Receivable. This demonstrates the flow of converting receivables to notes and handling defaults, making it crucial to track what customers owe accurately.

Proper management of Accounts Receivable is pivotal, ensuring that the cash flow is maintained by efficiently collecting debts from customers. It also involves being proactive in identifying receivables that may turn into bad debts.

Notes Receivable

Notes Receivable are promissory notes that encapsulate a written promise from customers to pay a specific amount by a certain date. This replaces the regular Accounts Receivable when the payments are formalized in this written promise.

Notes Receivable are critical for businesses, as they ensure a legal promise to pay with terms involving the principal amount, interest rate, and maturity date. When Austin, Inc. records receiving a note, like the one from Haskins for $30,000 for 60 days at 10%, it represents a clear, enforceable pledge to pay, adding interest revenue to the business.

Creating a journal entry transits the value from Accounts Receivable to Notes Receivable, highlighting the importance of such notes in managing receivables effectively. By understanding the nuances of Notes Receivable, businesses can better predict future cash flows and have legally binding commitments from their customers.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts is an estimated figure set aside to cover potential uncollectible accounts receivable. It serves as a cushion for amounts that might not be paid by customers, often determined by historical data and current economic conditions.

In this exercise, Austin, Inc. wrote off R. Longo's account as uncollectible using this allowance method. The allowance before adjustment was actually a debit balance, indicating that the losses exceeded estimates, prompting an adjustment to achieve the new desired balance of $13,200.

Managing this allowance effectively involves regular assessment and estimation to ensure that it adequately covers expected bad debts. It affects both the balance sheet and the income statement, as adjustments create an expense that impacts profits. By properly maintaining this account, businesses can achieve better accuracy in financial reporting and safeguard their financial health.

Interest Revenue

Interest Revenue represents the earnings a business makes from extending credit or investing its funds. In this scenario, Austin, Inc. earns interest revenue from notes receivable, which is a crucial part of its revenue stream.

For example, from the Haskins note, Austin, Inc. earned $500 in interest over 60 days. Calculating interest involves the formula: \[\text{Interest} = \text{Principal} \times \text{Rate} \times \frac{\text{Time}}{360}\]This formula helps to determine accurate interest revenue for any given period. Proper accounting for interest revenue requires adjusting entries to reflect earned interest accurately at the end of an accounting period.

Austin, Inc.’s final adjustments on December 31 for notes such as those from R. Canal exemplify end-of-period interest calculations. By ensuring interest is appropriately accounted for, businesses are able to showcase true earnings potential stemming from their credit policies.