Question

On October 1, 2018, Pipes & Plumbing Company received a 10 percent, six - month note receivable from Kirkman Constructions, one of Pipes & Plumbing Company’s problem credit customers. Kirkman had owed $75,000 on an account receivable that had defaulted. Pipes & Plumbing insists that any customer who fails to pay an account receivable when due must replace their unpaid account receivable with an interest - bearing note receivable. Assume the Pipes & Plumbing Company makes adjusting entrie s for accrued interest revenue once a year on December 31.

Journalize the following events on the books of Pipes & Plumbing Company:

1. Record the receipt of the note on October 1 in settl eme nt of the account receivable

2. Record accrued interest at December 31, 2018.

3. Assume that Kirkman Constructions pays the note plus accrued interest in ful l. Record the collection of the principal and interest on April 1, 2019.

4. Assume that Kirkman Constructions did not make the necessary principal and i nterest payment on April 1, 2019, defaulting on his obligation. Record the default on April 1, 2019.

5. Why does Pipes & Plumbing Company insist that any customer who fails to pay must replace their unpaid account receivable with an in terest - bearing note receivable?

Answer 1

On 1st October 2018 Pipes&Plumbing company holds note receivable at 10% interest, receivable in 6 months for an amount $75000.

Issued by Kirkman who is customer of Company for an owed amount of $75000 as note payable.

Following are the Journal entries

		Debit $	Credit $
1st Oct.	Note receivable a/c	75000
	To receivables from Kirkman		75000
	( Being conversion of amount receivable from Kirkman who is customer of the company owed $75000)
Dec.1st	Interest on Note receivable	1875
	To Interest revenue		1875
	(Being 3 months accrued interest recorded at 10% on $75000. Interest =(75000×10%)×3/12=$1875
April 1, 2019	cash a/c	75000
	To Note receivable a/c		75000
	(Being collection principal amount on note recivable from Kirkman)
April1st 2019	Cash a/c	3750
	To Interest on note receivable		1875
	To interest revenue		1875
	(Being interest accrued on Dec.2018 and interest up to march 2019 received total amount$3750.)
April1st 2019	If default in payment
	Accounts receivable from Kirkman	78750
	To Note receivable a/c		75000
	To Interest revenue		1875
	To Interest on Note receivable		1875
	(Default in payment by Krrkman , entry made to record debt in to account receivable on dishonoured of note)

(5) Answer :Reasons for why companies insist that any customer fails to pay on time, replace their unpaid account with interest bearing note receivable

1. Note receivable is a legal contract with payment terms on the other hand it is only an informal agreement.
2. Note receivable beyond one year
3. Note receivable have several characteristics that include principal, Interest, payment terms, length of contract.
4. Account receivable dose not include interest receivable.

Based on above mentioned reasons Pipes&Plumbing company insist that an customer to replace an unpaid amount with note receivable.