Dec. 13 Accepted a $15,000, 45-day, 7% note in granting Miranda Lee a time extension on her past-due account receivable. 31 Prepared an adjusting entry to record the accrued interest on the Lee note. Jan. 27 Received Lee's payment for principal and interest on the note dated December 13. Mar. 3 Accepted a $9,000, 10%, 90-day note in granting a time extension on the past-due account receivable of Tomas Company. 17 Accepted a $7,000, 30-day, 8% note in granting H. Cheng a time extension on his past-due account receivable. Apr. 16 H. Cheng dishonored his note. May 1 Wrote off the H. Cheng account against the Allowance for Doubtful Accounts. June 1 Received the Tomas payment for principal and interest on the note dated March 3.

Calculate the interest amounts and use those calculated values to prepare journal entries.

a) Calculation of interest amounts:

1) Accrued interest on December 31 for Lee is calculated as follows:

$15,000 x 7% x 18/45 days = $420

2) Accrued interest on Jan. 27 for Lee:

$15,000 x 7% x 27/45 days = $630

3) Accrued Interest on April 15 for H. Chegg:

$7,000 x 8% x 30/30 days = $560

4) Accrued interest on June 1 for Tomas Company:

$9,000 x 10% x 90/90 days = $900

b) Journal entries:

1) Dec 13:

Debit Notes Receivable with $15,000

Credit Accounts Receivable with $15,000

To record the 45-day 7% Note from Miranda Lee

2) Adjusting Accrued Interest on December 31

Debit Interest Receivable on Notes with $420

Credit Interest on Notes with $420

To record accrued 18/45 days 7% interest on Miranda Lee's note due.

3) January 27:

Debit Cash with $16,050

Credit Notes Receivable with $15,000

Credit Interest on Notes with $630

Credit Interest Receivable on Notes with $420

To record full settlement on notes and interest by Miranda Lee.

4) March 3:

Debit Notes Receivable with $9,000

Credit Accounts Receivable with $9,000

To record the 10% 90-day note granted to Tomas Company.

5) March 17:

Debit Notes Receivable with $7,000

Credit Accounts Receivable with $7,000

To record the 8% 30-day note granted to H. Cheng.

6) April 16:

Debit Accounts Receivable with $7,000

Credit Notes Receivable with $7,000

To record the dishonor of note by H. Cheng.

Debit Interest Receivable on Notes with $560

Credit Interest on Note with $560

To record interest due on H. Cheng's note.

May 1:

Debit Bad debts with $7,560

Credit Accounts Receivable with $7,000

Credit Interest Receivable on Note with $560

To write off H. Cheng's account and the interest due on note.

June 1:

Debit Cash with $9,900

Credit Notes Receivable with $9,000

Credit Interest on Note with $900

To record full settlement of account by Tomas Company.

Explanation:

a) When a note is accepted, the Accounts Receivable is credited and the Notes Receivable is debited.  This transfers the amount due from Accounts Receivable to Notes Receivable, effectively changing the nature of the debt.  Accounts Receivable does not attract interest and is granted for a limited period unlike a Notes Receivable, which attracts agreed interest.

b) On December 31, the accrued interest on Lee's note is recognized in accordance with the matching principle and accrual concepts.  Therefore, 18 days' interest is accrued as calculated above.

c) When a note receivable is settled, the Cash Account is debited with a credit to Notes Receivable and another credit to Interest Receivable on Note, if it had been accrued or Interest on Note account.

d) If a note receivable is dishonored, the accounts are reversed accordingly with a debit to the Accounts Receivable and a credit to the Notes Receivable.

e) When a dishonored note is written off, the Accounts Receivable is credited and Bad Debts is debited.

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