Question

On August 1, year 1, Hampton Construction received a 9 percent, 6-month note receivable from Dusty Roads, one of Hampton Construction’s problem credit customers. Roads had owed $44,900 on an outstanding account receivable. The note receivable was taken in settlement of this amount. Assume that Hampton Construction makes adjusting entries for accrued interest revenue once each year on December 31. Record the receipt of the note on August 1 in settlement of the account receivable. Record accrued interest at December 31, year 1. Assume that Dusty Roads pays the note plus accrued interest in full. Record the collection of the principal and interest on January 31, year 2.

Answer 1

Answer: 1. 44900

2. 1683.75

3. 46920.5

Explanation:

1. Record the receipt of the note on August 1 in settlement of the account receivable. Record accrued interest at December 31, year 1.
2. Record accrued interest at December 31, year 1
3. Assume that Dusty Roads pays the note plus accrued interest in full. Record the collection of the principal and interest on January 31, year 2.

2011

August 1st.

1. Notes Receivable -------------------------------------------- 44900

        Accounts receivable (dusty roads) --------------------            44900

     Accepted a six=month, 9% note receivable in

     settlement of an account receivable on August 1st, 2011

December 31st.

2. Interest receivable ---------------------------------------------------    1683.75

    Interest revenue --------------------------------------------------                  1683.75

   To record accrued interest earned from August through

December:  $44900× 9% × $\frac{5}{12}$ = $1683.75

2012

January 31st

3. Cash ------------------------------------------------------------    46920.5

      Notes receivable ------------------------------------------------    44900

      Interest receivable ------------------------------------------------     1683.75

      Interest revenue ------------------------------------------------         336.75

To record collection of six-month note plus interest from

Dusty Roads. Total interests amount to $2020.5 ($44900 ×  9% × $\frac{1}{2}$), of which $336.75 was earned in 2012.

note: (interest revenue = total interests amount - interest receivable = $2020.5 - $1683.75 = $336.75 )