Question

On August 1, 2021, Trico Technologies, an aeronautic electronics company, borrows $21 million cash to expand operations. The loan is made by FirstBanc Corp. under a short-term line of credit arrangement. Trico signs a six-month, 9% promissory note. Interest is payable at maturity. FirstBanc Corp.’s year-end is December 31.

 

Required:

1. Record the acceptance of the note by FirstBanc Corp.

2. Record the appropriate adjustment for the note by FirstBanc Corp. on December 31, 2021.

3. Record the receipt of cash by FirstBanc Corp. at maturity.

Answer 1

Notes receivable:

Notes receivable is a credit agreement between a lender and a borrower formally. These mutual agreements result due to loan to other entities that include affiliated companies and stockholders due to the sale of merchandise. Fixed amount of interest is paid for the credit period of note till maturity.

 

Interest on Notes Receivable:

Notes receivables are the evidence of credit sales issued by the seller to its buyer. These are also known as short-term assets. Interest on the note is the return on the money lend as notes receivables. The following is the formula to calculate interest:

 

Journal entries:

Journal entry records the accounting transactions of a business in a journal book. All the business transactions are recorded in the chronological order using the double entry system of accounting.

 

(1)

Journal entry to record the acceptance of note by FB Corp:

Date	Account title & Explanation	Debit ($)	Credit ($)
1-Aug	Notes receivable	21,000,000
2021	Cash		21,000,000
	[To record the acceptance of notes receivable.]

 

Explanation:

Cash balance is decreased by lending money and asset to receive back will also increase. Hence, cash account needs to be credited and notes receivable account needs to be debited by $21 million.

 

(2)

Journal entry to record the appropriate adjusting entry for note on December 31, 2021:

Date	Account title & Explanation	Debit ($)	Credit ($)
31-Dec	Interest receivable ($21 million × 9% × 5/12)	787,500
2021	Interest revenue		787,500
	[To record the interest revenue earned, but not received.]

 

Explanation:

Five months interest should be recorded by $787,500. Income needs to be credited to profit and loss account and receivables to receive interest should be created at the asset side of the balance sheet. Hence Interest receivables needs to be debited and interest revenue account needs to be credited.

 

(3)

Journal entry to record the receipt of cash at maturity: 

Date	Account title & Explanation	Debit ($)	Credit ($)
31-Jan	Cash	21,945,000
2022	Interest revenue ($21 million × 9% × 5/12)		787,500
	Interest revenue ($21 million × 9% × 1/12)		157,500
	Notes receivable		21,000,000
	[To record the collection of notes receivable and interest.]

 

Explanation:

Notes should be payable at the time of maturity by TT, hence assets would be reduced and cash balance is increased with the principal and interest amount. Hence, notes receivables should be credited, interest revenue should be credited by remaining amount of interest for one month. Interest receivable created for 5 months should be reversed hence it should be credited and cash is debited by total amount of $21,945,000.

Journal entry to record the acceptance of note by FB Corp:

Date	Account title & Explanation	Debit ($)	Credit ($)
1-Aug	Notes receivable	21,000,000