Reeves Supply Co. has the following transactions related to notes receivable dur

Question

Reeves Supply Co. has the following transactions related to notes receivable during the last 2 months of 2014.

Nov. 1 Loaned $24,000 cash to Norma Jeanne on a 1-year, 11% note. Dec. 11 Sold goods to Bob Sharbo, Inc., receiving a $66,000, 90-day, 9% note. 16 Received a $76,560, 6-month, 10% note in exchange for Richard Russo Reeves Supply Co. has the following transactions related to notes receivable during the last 2 months of 2014.

Nov. 1 Loaned $24,000 cash to Norma Jeanne on a 1-year, 11% note. Dec. 11 Sold goods to Bob Sharbo, Inc., receiving a $66,000, 90-day, 9% note. 16 Received a $76,560, 6-month, 10% note in exchange for Richard Russo Nov. 1 Loaned $24,000 cash to Norma Jeanne on a 1-year, 11% note. Dec. 11 Sold goods to Bob Sharbo, Inc., receiving a $66,000, 90-day, 9% note. 16 Received a $76,560, 6-month, 10% note in exchange for Richard Russo

Explanation / Answer

follow this

They don't give you any information regarding how the interest earned is recorded (i.e.monthly, or just at the end of a calendar year, and then at the end of the note term) so there are a couple of ways to record the entries when the note is paid off. I'll show two ways below. One of them will be the correct answer:

The entries on Nov 1 when the loan is granted is:

Nov. 1, 2008:
Debit Notes Receivable $15,000
Credit Cash $15,000

Assuming Orosco is using an accrual based accounting system, on Dec. 31, you need to record the interest earned from the date of grant to the year end. That entry would be:

December 31, 2008:

Debit Interest Receivable $250
Credit Interest Revenue $250
Calculated as $15,000 X 10% / 12 X 2 - to calculate two months interest earned

A) on November 1, 2009 if that is the day the note is paid), the entry is:

November 1, 2009

Debit Cash $16,500
Credit Notes Payable $15,000
Credit Interest Receivable $250
Credit Interest Revenue $1,250

This assumes that you did not record any interest revenue each month in 2009, so you needed to record 10 months of interest on the date the note is paid. That amount is ($!5,000 X 10% / 12 X 10)

If you did record the interest earned each month ($125 per month), then the entry on November 1, 2009 would be:

Debit Cash $16,500
Credit Notes Payable $15,000
Credit Interest Receivable $1,500

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