Question

On October 1, 2017, Flint Corporation sold a harvesting machine to Pearl Industries. Instead of a cash payment, Pearl Industries gave Flint a $139,000, two-year, 12% note; 12% is a realistic rate for a note of this type. The note required interest to be paid annually on October 1, beginning October 1, 2018. Flint’s financial statements are prepared on a calendar-year basis. Required:

a) Assuming that no reversing entries are used and that Pearl Industries fulfills all the terms of the note, prepare the necessary journal entries for Flint Corporation for the entire term of the note

. b) Repeat the journal entries under the assumption that Flint Corporation uses reversing entries, but only up to and including October 1, 2018.

Answer 1

1)

Journal Entries

Date	Particulars	Debit $	Credit $
Oct 1, 2017	Note Receivable a/c Dr.	139,000
	To Machinery		139,000
Dec 31, 2017	Interest Receivable	4,170
	To Interest Income		4,170
Oct 1, 2018	Interest Receivable a/c Dr.	12,510
	To Interest Income		12,510
Oct 1, 2018	Cash a/c Dr.	86,180
	To Note Receivable		69,500
	To Interest		16,180
Dec 31, 2018	Interest Receivable a/c Dr.	4,170
	To Interest Income		4,170
Oct 1, 2019	Interest Receivable a/c Dr.	12.510
	To interest Income		12,510
Oct 1, 2019	Cash a/c Dr.	86,180
	To Note Receivable		69,500
	To Interest		16,680

Interest = 139,000 * 12% = 16,680

2)

Journal Entries

Date	Particulars	Debit $	Credit $
Oct 1, 2017	Note Receivable a/c Dr.	139,000
	To Machinery		139,000
Dec 31, 2018	Interest Receivable a/c Dr.	4,170
	To Interest Income		4,170
Jan 1, 2018	Machinery a/c Dr.	139,000
	To Note Receivable		139,000
Jan 1, 2018	Interest Income a/c Dr.	4,170
	To Interest Receivable		4,170
Oct 1, 2018	Cash a/c Dr.	86,180
	To Note Receivable		69,500
	To Interest		16,680

Interest = 139,000 * 12% * 3/12 = 4,170 (Interest taken for 3 months i.e. from Oct 1 to Dec 31)

Reversing Entries only allowed for Accrued Income, Accrued Expenses, Advance Income and Prepaid Expenses.

Calendar year is January to December.