/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 5 Recording Dishonored Promissory ... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 8: Problem 5

Recording Dishonored Promissory Notes Receivable On October 1 , the Humpback Company accepted a \(\$ 50,000,60\) day, nine percent, promissory note in exchange for an overdue accounts receivable balance for the same amount from the Schwartz. Company. On November 30 , the Schwartz Company dishonored the note. What journal entry should be recorded on November 30 ? a. Debit Dishonored Note Receivable Expense; credit Notes Receivable. b. Debit Allowance for Doubtful Accounts; credit Notes Receivable. c. Debit Accounts Receivable; credit Interest Income; credit Notes Receivable. d. None of the above entries is correct.

Short Answer

Expert verified
The correct journal entry is option c: Debit Accounts Receivable; Credit Interest Income; Credit Notes Receivable.

Step by step solution

01

Identify the Date and Amount of the Note

The note was accepted on October 1 for $50,000 and was due in 60 days. As November 30 is the 60th day, this is the day the note matures.
02

Calculate Interest Earned on the Note

The interest rate is 9% per annum. Calculate the interest for 60 days: Interest = Principal 脳 Rate 脳 Time = $50,000 脳 0.09 脳 (60/360) = $750.
03

Record the Dishonored Note

Since the note was dishonored, it means Schwartz Company failed to pay the amount due. We need to reverse the note back to Accounts Receivable and also record the interest. The journal entry is: Debit: Accounts Receivable - Schwartz Company $50,750 Credit: Notes Receivable $50,000 Credit: Interest Income $750.
04

Check the Answer Options

Based on the journal entry, option c matches our solution: Debit Accounts Receivable; Credit Interest Income; Credit Notes Receivable.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

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

Promissory Notes
A promissory note is a written agreement where one party promises to pay a specific sum of money to another party at a future date or on demand. This financial instrument is crucial in business transactions, acting as a legal evidence of debt.
Essentially, it contains details about the amount, interest rate, parties involved, and the maturity date.
  • The promisor (or maker) is the one promising to pay, while the payee is the one receiving the payment.
  • These notes can be negotiable, meaning they can be transferred to others.
  • In general, promissory notes help businesses manage credit sales, which is why they're often used to replace outstanding debts like accounts receivable.
This legal document provides assurance to the creditor and a structured repayment plan to the debtor.
Interest Calculation
Calculating interest is a fundamental part of understanding promissory notes. The interest can be simple or compound, but for most short-term notes, simple interest is utilized.
To calculate the interest on a promissory note, you use the formula:
  • \[ \text{Interest} = \text{Principal} \times \text{Rate} \times \frac{\text{Time (in days)}}{360} \]
This formula helps determine how much additional money the promisor must pay the payee as compensation for borrowing the funds.
For instance, if a note is worth \(50,000 with a 9% annual rate and a 60-day term, the interest calculation would be:\[ \)50,000 \times 0.09 \times \frac{60}{360} = $750 \].
This ensures that both, the calculation method and the expected interest, are clear and transparent to involved parties.
Accounts Receivable
Accounts Receivable (AR) is the money owed to a business by its customers for goods or services delivered but not yet paid for. It often represents one of the most significant assets for businesses, reflecting future cash inflows.
  • AR is recorded under current assets on a balance sheet.
  • Management of AR is crucial since it affects a company鈥檚 cash flow and financial health.
  • With promissory notes, AR can be converted into a note receivable for additional security and defined repayment terms.
When a promissory note is dishonored, as in the example exercise, the note's value and any accrued interest revert back to AR.
This ensures that the company still recognizes the debt owed, allowing it to continue efforts to collect the money.
Notes Receivable
Notes Receivable represents written promises that a customer, or borrower, will pay a business at a specified time. Recorded as current assets if due within a year, they provide both documentation and assurance.
  • Notes receivable often come into play when an AR is converted for a structured payment arrangement.
  • The transaction includes the note's principal amount along with any maturity interest mentioned in the note.
  • They are considered more formal and have legally enforceable terms as compared to accounts receivable.
In scenarios where a note is dishonored, it must be reclassified. This involves reversing the note back into accounts receivable while recording any interest earned, as shown in the example exercise.
This process ensures accuracy in financial statements and maintains the continuity of the collection efforts.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

A firm receives a six-month note from a customer. The note has a face amount of \(\$ 4,000\) and an interest rate of nine percent. What is the total amount of interest to be received? a. \(\$ 1,080\) b. \(\$ 30\) c. \(\$ 360\) d. \(\$ 180\)

Haley Company estimates its bad debts expense by aging its accounts receivable and applying percentages to various age groups of the accounts. Haley calculated a total of \(\$ 2,100\) in possible credit losses as of December 31 . Accounts Receivable has a balance of \(\$ 98,000\), and the Allowance for Doubtful Accounts has a credit balance of \(\$ 500\) before adjustment at December 31 . What is the December 31 adjusting entry to provide for credit losses? What is the net amount of accounts receivable that should be included in current assets?

Credit Card Sales Lake Heart Marina sells boats and other water recreational vehicles (approximately three vehicles are sold each week). The following transactions occurred during the third week of May: May 15 Sold a \(\$ 1,500\) boat trailer \((\$ 760\) cost \()\) to Ed and Jane Peeler, who paid using a personal check. 16 Sold a \(\$ 20,000\) boat ( \(\$ 13,000\) cost) to the Lake Heart Lake Patrol on account, with \(2 / 10\), n/30 terms. 18 Sold a \(\$ 2,800\) water scooter ( \(\$ 1,500\) cost) to Bryan Wagner, who used the United Merchants Card to charge the cost of the water scooter. Lake Heart Marina mailed the credit card sales slip to United Merchants the same day. United Merchants will send a check within seven days, net of a three percent fee. 19 Sold a \(\$ 9,000\) fishing boat \((\$ 5,000\) cost) to Michael Moffett, who used the Great American Bank Card to pay for the boat. Lake Heart Marina deposited the credit card sales slip the same day and received an immediate credit in the company's checking account, net of a two percent fee. 20 Received payment from the Lake Heart Lake Patrol for the boat purchased on May \(16 .\) 21 Received payment from United Merchants for the May 18 transaction. Required Prepare journal entries to record these transactions. The Lake Heart Marina uses a perpetual inventory system.

What are the two most commonly used methods of estimating the bad debts expense when the allowance method is employed? Describe them.

When a firm provides for credit losses under the allowance method, why is the Allowance for Doubtful Accounts credited rather than Accounts Receivable?
See all solutions

Recommended explanations on Math Textbooks

Statistics

Read Explanation

Pure Maths

Read Explanation

Geometry

Read Explanation

Decision Maths

Read Explanation

Discrete Mathematics

Read Explanation

Calculus

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.