Question

I. On September 12, 2010, Mardi Gras Mambo Inc. received a $6,000 8%, 120 day note on account from Throwin’ Things Corporation

a. Is the note a note receivable or a note payable for Mardi Gras Mambo?

b Is Mardi Gras Mambo the maker or the payee of the note?

c What is the face amount of the note?

d What is the total amount of cash that is due at maturity (i.e., what is the maturity value of the note)?

e What is the due date of the note?

f What is the principal of the note?

g As of September 30, 2010, how much interest has Mardi Gras Mambo accrued on the note?

h. Prepare the journal entries for the following transactions:

(1) September 12

(2) September 30

(3) At maturity date (assume no entries regarding the note have been made since September 30)

II. Assume that the note is non-interest bearing and that the market rate of interest for similar securities is 8% (all other terms are the same). Answer each of the following:

a What is the total amount of cash that is due at maturity (i.e., what is the maturity value of the note)?

b. What is the principal of the note?

c. Prepare the journal entries for the following transactions:

(1) September 12

(2) September 30

(3) At maturity date (assume no entries regarding the note have been made since September 30

Answer 1

Note: Both questions are separate & independent. So as per rule I am answering first question including all sub-parts of this first question.

Question – I;

(a).

This note is a note receivable for Mardi Gras Mambo.

Explanation;

As we know that when a party receive note then for receiving party this will be known as note receivable and for other party it will be known as note payable. Hence for Mardi Gras Mambo it is note receivable and for Throwin’ Things Corporation it is note payable.

(b).

Mardi Gras Mambo is the payee of the note.

Explanation;

There are two parties of the Note. One is maker and other is Payee. Payye is the party who will receive payment hence as per information of this question Mardi Gras Mambo is the payee of the note. Wheras Throwin’ Things Corporation is the party who will promise to pay money to Mardi Gras Mambo hence Throwin’ Things Corporation is the Maker.

(C).

Face amount of the note = $6000

Explanation;

Face value of the note is the base amount for which a Note is accepted or written hence as per information of the question $6000 is the face value of note.

(D).

Total amount of cash that is due at maturity = $6160

Explanation;

Face value of Note = $6000

Interest rate is given = 8%

Time is given = 120 days

Hence interest amount will be ($6000 * 0.08 * 120 / 360) = $160

Thus total amount of cash that is due at maturity will be (Face value + Interest)

($6000 + $160) = $6160

(e). Due date of the note is January 10, 2011

Explanation;

Date of receipt of note is given = September 12, 2010

Duration of note is given = 120 days

Thus due date will be (18 days of September + 31 days of October + 30 days of November + 31 days of December + 10 days in january 2011)

So due date will be January 10, 2011

(f). Principal of note = $6000

Explanation;

Principal refers to the face value for which a note is received, it is given in the question that note is for $6000 hence principal of note will be $6000.

(g). As of September 30, 2010, interest has Mardi Gras Mambo accrued on the note = $24

Explanation;

Face value = $6000

Interest rate = 8%

Days from 12 Sep. to 30 Sep. (30 – 12) = 18 days

So accrued interest on September 30, 2010 will be ($6000 * 0.08 * 18 / 360) = $24

(h).

Date	Accounts Titles & Explanation	Debit	Credit
Sep. 12, 2010	Note receivable	$6000
	Throwin’ Things Corporation		$6000
	(For receiving note from Throwin’ Things Corporation)
Sep. 30, 2010	Interest receivable	$24
	Interest revenue		$24
	(For recording accrued interest on Sep. 30)
Jan. 10, 2011	Cash	$6160
	Note receivable		$6000
	Interest receivable		$24
	Interest revenue		$136
	(For recording receipt of cash at maturity