Question

On August​ 31, 2018​, Brooke Tallen borrowed $ 6 comma 000 from Boulware State Bank. Tallen signed a note​ payable, promising to pay the bank principal plus interest on August​ 31, 2019. The interest rate on the note is 12​%. The accounting year of Boulware State Bank ends on June​ 30, 2019. Journalize Boulware State​ Bank's (a) lending money on the note receivable at August​ 31, 2018​, ​(b) accrual of interest at June​ 30, 2019​, and​ (c) collection of principal and interest at August​ 31, 2019​, the maturity date of the note.

Answer 1

Answer:

When  Boulware State​ Bank lend money

Note Receivable $6,000 (debit)

Cash $6,000 (credit)

When Interest accrues on the Note Receivable on June​ 30, 2019.

Note Receivable $600 (debit)

Interest Income $600 (credit).

When the Interest and Principle are collected on August 31, 2019

Cash $6,720 (debit)

Note Receivable $6,720 (credit)

Explanation:

When  Boulware State​ Bank lending money

Recognize an Asset - Note Receivable and a decrease in the assets of Cash.

Note Receivable $6,000 (debit)

Cash $6,000 (credit)

When Interest accrues on the Note Receivable on June​ 30, 2019.

Hint :Interest that expires is for 10 months and must be accounted as such.

Note Receivable $600 (debit)

Interest Income $600 (credit)

Interest Income = $6,000 × 12% × 10/12

                          = $600.

When the Interest and Principle are collected on August 31, 2019

Interest for July and August for 2020 must first be accounted.

Note Receivable $120 (debit)

Interest Income $120 (credit)

Interest Income = $6,000 × 12% × 2/12

                          = $120.

Thus entry to record  collection of principal and interest will be :

Cash $6,720 (debit)

Note Receivable $6,720 (credit)

Note Receivable = Principle + 2019 interest + 2020 interest

                            = $6,000 + $600 + $120

                            = $6,720