Question

Nov 10

Sold merchandise on account to J. Brown, $5,000.

Nov 25

J. Brown paid $1,000 and gave a $4,000, 30-day, 6.5% note to extend time for payment.

Dec 25

J. Brown’s note is dishonored.

Explain in words each journal entry by answering the question below in 250 words

1) What happened in this transaction?

2) Which account(s) will be debited in this journal entry? Please explain how you determined the amount of the debit(s) recorded.  

3) Which account(s) will be credited in this journal entry? Please explain how you determined the amount of the credit(s) recorded.

Answer 1

• All working forms part of the answer
• All answers are given for each entry
• Entry no. 1

Date	Accounts title	Debit	Credit
10-Nov	Accounts receivables	$                          5,000.00
	Sales revenue		$                                 5,000.00
	(merchandise sold on account)

--Under this transaction, merchandise is sold for $ 5,000 but cash is not received. Instead, the sales are on account or this is the case of Credit Sales, the payment of which will be received in future period.

---Account that will be debited is “Accounts receivables”, the amount will be equal to the amount of Sales.

---Account that will be credited is “sales Revenue”, by the amount the goods are sold for.

• Entry no 2

Date	Accounts title	Debit	Credit
25-Nov	Cash	$                          4,000.00
	Notes Receivables	$                          1,000.00
	Accounts receivables		$                                 5,000.00

---Under this transaction, the buyer has paid $ 4,000 out of $ 5,000 of credit sale. For remaining $1,000 he has issued a Note at 6.5% for 30 days.

---Accounts that will be debited are : Cash account, by the amount of cash received which is $ 4,000;
and Notes Receivables account, by the amount of $ 1,000 because out of $ 5,000 that was due, $ 4,000 was received as cash.

---Account that will be credited is “Accounts receivables” in order to close it as cash is received against it, and for remaining balance Notes receivables been received. Amount credit will be equal to the amount debited on Nov 10 Entry.

• Entry No 3

Date	Accounts title	Debit	Credit
01-Dec	Accounts receivables	$                          1,005.42
	Notes Receivables		$                                 1,000.00
	Interest Revenue		$                                          5.42

---Under this transaction, the buyer had to paid $ 1,000 of notes amount plus interest, but he didn’t pay and the note got dishonoured.

---Account that will be debited is “Accounts receivables”, and the amount will be total of Notes amount (that got dishounoured) and 30 days (1 month) interest there on. Interest amount = $ 1,000 x 6.5% x (1/12)months = $ 5.42. Hence, amount debited = 1000 + 5.42 = $ 1,005.42

---Accounts that will be credited are:
notes receivables account that got debited on Nov-25, but now dishonoured, of amount $ 1,000.
Interest revenue that was due on the said note for 30 days (1 month). Interest amount = $ 1,000 x 6.5% x (1/12)months = $ 5.42.