On January 2, SHB Company receives a 3-year, $10,000, noninterest bearing note,
ID: 2391042 • Letter: O
Question
On January 2, SHB Company receives a 3-year, $10,000, noninterest bearing note, the present value of which is $7,722. The rate implicit on this transaction is 9%. You are completing SHB's note receivable account.
To prepare each required journal entry:
Enter the corresponding debit or credit amount in the associated column.
Round all amounts to the nearest whole number.
Not all rows in the table might be needed to complete each journal entry.
If no journal entry is needed, check the “No entry required” box at the top of the table as your response.
1. Prepare the entry to record the acquisition of the note.
No Entry Required
Debit
Credit
2. Prepare the adjusting entry necessary to record interest revenue at the end of the first year.
No Entry Required
Debit
Credit
3. Prepare the adjusting entry necessary to record interest revenue at the end of the second year.
No Entry Required
Debit
Credit
Account NameDebit
Credit
Notes receivable Discount on notes receivable CashExplanation / Answer
Solution:
1. Prepare the entry to record the acquisition of the note.
Account Name
Debit
Credit
Notes receivable
$10,000
Discount on notes receivable
$2,278
Cash
$7,722
2. Prepare the adjusting entry necessary to record interest revenue at the end of the first year.
Account Name
Debit
Credit
Discount on notes receivable
(Carrying Value of Notes Receivable $7,722*Implicit Rate 9%)
$695
Interest revenue
$695
3. Prepare the adjusting entry necessary to record interest revenue at the end of the second year.
Account Name
Debit
Credit
Discount on notes receivable
(Note 1)
$758
Interest revenue
$758
Note 1 ---
Carrying Value of Notes Receivable at the end of year 2 = Total Par Value $10,000 – Unamortized discount on notes receivable
Unamortized Discount on Notes Receivable = Total Discount – Amortized Discount in Year 1
= $2,278 - $695
= $1,583
Carrying Value of Notes Receivable at the end of year 2 = Total Par Value $10,000 – Unamortized discount on notes receivable $1,583
= $8,417
Discount Amortized during year 2 = Carrying Value $8,417 * Implicit Rate 9% = $758
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Account Name
Debit
Credit
Notes receivable
$10,000
Discount on notes receivable
$2,278
Cash
$7,722
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