Question

On January 2, SHB Company receives a 3-year, $10,000, noninterest bearing note, the present value of which is $7,722. The rate implicit on this transaction is 9%. You are completing SHB's note receivable account.

To prepare each required journal entry:

Enter the corresponding debit or credit amount in the associated column.

Round all amounts to the nearest whole number.

Not all rows in the table might be needed to complete each journal entry.

If no journal entry is needed, check the “No entry required” box at the top of the table as your response.

1. Prepare the entry to record the acquisition of the note.

No Entry Required

Account Name	Debit	Credit
Notes receivable
Discount on notes receivable
Cash

2. Prepare the adjusting entry necessary to record interest revenue at the end of the first year.

No Entry Required

Account Name	Debit	Credit
Discount on notes receivable
Interest revenue

3. Prepare the adjusting entry necessary to record interest revenue at the end of the second year.

No Entry Required

Account Name	Debit	Credit
Discount on notes receivable
Interest revenue

Answer 1

Solution:

1. Prepare the entry to record the acquisition of the note.

Account Name	Debit	Credit
Notes receivable	$10,000
Discount on notes receivable		$2,278
Cash		$7,722

2. Prepare the adjusting entry necessary to record interest revenue at the end of the first year.

Account Name	Debit	Credit
Discount on notes receivable (Carrying Value of Notes Receivable $7,722*Implicit Rate 9%)	$695
Interest revenue		$695

3. Prepare the adjusting entry necessary to record interest revenue at the end of the second year.

Account Name	Debit	Credit
Discount on notes receivable (Note 1)	$758
Interest revenue		$758

Note 1 ---

Carrying Value of Notes Receivable at the end of year 2 = Total Par Value $10,000 – Unamortized discount on notes receivable

Unamortized Discount on Notes Receivable = Total Discount – Amortized Discount in Year 1

= $2,278 - $695

= $1,583

Carrying Value of Notes Receivable at the end of year 2 = Total Par Value $10,000 – Unamortized discount on notes receivable $1,583

= $8,417

Discount Amortized during year 2 = Carrying Value $8,417 * Implicit Rate 9% = $758

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you