Finance Chapter on Notes and Interest

Questions and Answers

What is a maker in the context of notes?

The maker is the individual or entity that signs a note, agreeing to pay the specified amount.

What is a payee?

The payee is the individual or entity to whom the note is payable.

What is the due date of a 60-day note signed on February 15 in a non-leap year?

April 16

How much interest will be due on a $2,000, 60-day, 6% note as of October 20?

$20 Signup and view all the answers

What is the formula to compute interest due on a maturity date?

Principal x Interest Rate x Time expressed in fraction of year Signup and view all the answers

What is the due date of a 90-day note signed on October 21?

January 19 Signup and view all the answers

What would the journal entry include for selling $5,000 in merchandise with a 90-day, 5% promissory note?

Debit to Notes Receivable for $5,000 Signup and view all the answers

How much interest will be due on a $5,000, 90-day, 4% note on its maturity date?

$50 Signup and view all the answers

What journal entry does Franz Co. make when Bria Co. pays a 30-day, 6% note of $5,000?

Debit to Cash for $5,025, Credit to Interest Revenue for $25, Credit to Note Receivable for $5,000 Signup and view all the answers

To compute interest due on a maturity date, which factors should be multiplied?

All of the above Signup and view all the answers

A note is honored when it is paid in full.

True Signup and view all the answers

What would Eli's journal entry include after receiving a 60-day, 6% note for $6,000?

Credit to Accounts Receivable for $6,000, Debit to Notes Receivable for $6,000 Signup and view all the answers

What would JC Co.'s debit entry include when receiving a 60-day, 6% note for $10,000?

Cash in the amount of $10,100 Signup and view all the answers

The maker of the note usually ______ the note and pays it in full.

honors Signup and view all the answers

When a note's maker is unable or refuses to pay at maturity, the note is considered ______.

dishonored Signup and view all the answers

What journal entry does Zest Co. make when AZC dishonors a 120-day, 6% note?

Debits to Accounts Receivable - AZC for $5,100 Signup and view all the answers

How much interest would be recorded on December 31 for a $12,000, 60-day, 6% note?

$20 Signup and view all the answers

What entries would appear on January 30 for Christy Co. after honoring a $1,000 note?

Credit to Notes Receivable for $1,000, Interest Receivable for $5, Interest Revenue for $5 Signup and view all the answers

When the maker of a note pays at maturity, the note is said to be dishonored.

False Signup and view all the answers

What journal entry does Horn Co. make when a customer dishonors a 60-day, 5% note for $3,000?

Debit to Accounts Receivable for $3,025 Signup and view all the answers

What adjusting entry does Lion Company make on December 31 for a $15,000, 30-day, 6% note?

Credit to Interest Revenue for $37.50 Signup and view all the answers

What entry includes the credit to Interest Revenue for $200 when a note is honored?

Teal Co.'s journal entry for the note from AZC Signup and view all the answers

What journal entry includes a credit to Notes Receivable for $2,000 on January 30?

Alice Co.'s entry upon receiving payment for a 90-day note Signup and view all the answers

What entry does Ian Co. make when Ali dishonors a 180-day, 5% note?

Credit to Notes Receivable for $1,000, Debit to Accounts Receivable - Ali for $1,025, Credit to Interest Revenue for $25 Signup and view all the answers

What is the result of converting receivables to cash before they are due?

To reduce the risk of nonpayment and to quickly generate cash. Signup and view all the answers

When a company sells its receivables, it is called:

Factoring Signup and view all the answers

When a company uses receivables as collateral for a bank loan, it is called:

Pledging Signup and view all the answers

What should Avi Co. record when pledging $12,000 accounts receivables for a $10,000 loan?

Footnote to the financial statements indicating that $12,000 of accounts receivables have been pledged. Signup and view all the answers

What is the formula for calculating accounts receivable turnover?

Net Sales / Average Accounts Receivable Signup and view all the answers

Compute accounts receivable turnover for Siu Co. in 2010 given net sales of $160,000 and accounts receivable of $38,000.

4.6 Signup and view all the answers

The two methods companies can use to convert receivables to cash before they are due include selling and pledging.

True Signup and view all the answers

What would the entry be for Tricon Co. selling $10,000 of accounts receivables with a 5% factoring fee?

Debit to Cash for $9,500 Signup and view all the answers

When a company's receivables are used as security for a loan, the company is said to have ______ its receivables.

pledged Signup and view all the answers

The ______ ratio indicates the quality and liquidity of accounts receivable.

accounts receivable turnover Signup and view all the answers

If a company has net sales of $250,000 and average receivables of $10,000, the accounts receivable turnover is ______.

25 Signup and view all the answers

The two most common receivables are BLANK receivables and BLANK receivables.

Accounts, Notes Signup and view all the answers

A(n) ____________ is a supplementary record created to maintain a separate account for each customer.

accounts receivable ledger Signup and view all the answers

The journal entry to record a sale on credit would include a debit entry to the Accounts BLANK account.

receivable Signup and view all the answers

The entry that Lane Co. will make to record the receipt of cash will include a credit to the BLANK account.

Accounts Receivable Signup and view all the answers

What would the entry to record merchandise sold for $1,000 on a credit card include?

Sales in the amount of $1,000. Accounts Receivable in the amount of $1,000. Signup and view all the answers

Match the following terms with their definitions:

Accounts Receivable = Amounts due from customers for credit sales Notes Receivable = An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates Receivable = Amount due from another party Signup and view all the answers

An accounts receivable ledger is a supplementary record to maintain an account for each customer.

True Signup and view all the answers

Ace Company sells merchandise to a customer in the amount of $200 on credit, terms n/30. The entry to record this sale would include a debit to the BLANK account.

Accounts Receivable Signup and view all the answers

How should Iron Company record the collection of cash from a customer who purchased merchandise last month on credit?

Credit to Accounts Receivable, Debit to Cash Signup and view all the answers

What would Simon Co.'s entry include when selling $500 of merchandise on store credit cards?

Debit to Accounts Receivable for $500 Signup and view all the answers

A BLANK is an amount due from another party.

receivable Signup and view all the answers

A(n) BLANK is a supplementary record created to maintain a separate account for each customer.

accounts receivable ledger Signup and view all the answers

To record a sale on account, the company should debit:

Accounts Receivable Signup and view all the answers

Companies allow customers to pay for products using third-party credit cards because:

The seller does not have to evaluate customer credit. Signup and view all the answers

What entry would Yao Co. make when collecting $740 from Ean, Inc. for a prior credit sale?

Debit to Cash, Credit to Accounts Receivable Signup and view all the answers

What would JD Co.'s entry include when it had $1,000 of credit card sales?

Cash for $970, Credit Card Expense for $30 Signup and view all the answers

To record a customer's check in full payment for a sale that was made the prior month, the company should debit the BLANK account.

Cash Signup and view all the answers

(Bad/Invalid) (collectible/debts) are accounts of customers who do not pay what they have promised to pay.

Bad, Debts Signup and view all the answers

Bad debts are:

All of the above. Signup and view all the answers

How would Harris Co. record the write-off of a $200 uncollectible account?

Debit Bad Debt Expense Signup and view all the answers

What entry would J. Whitlock Co. include when recording $1,000 of credit card sales?

Debit to Credit Card Expense for $50 Signup and view all the answers

To record the sales transaction of $1,000 on a bank credit card less a 3% fee, the entry would include a debit to Cash in the amount of $.

970 Signup and view all the answers

What entry should be made when a previously written-off account is later collected?

Debit to Accounts Receivable, Credit to Bad Debts Expense Signup and view all the answers

The allowance method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

False Signup and view all the answers

The direct write-off method records bad debts expense only when an account becomes uncollectible, which is not always in the same period as the sale. For this reason, the direct write-off method violates the BLANK BLANK principle.

expense recognition Signup and view all the answers

The BLANK method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

direct write-off Signup and view all the answers

What is the total decrease to net income related to JD Co.'s entry for $200 bad debt write-off?

$0 Signup and view all the answers

The allowances of accounting for bad debts include which of the following?

Both A and B Signup and view all the answers

What would the entry include for Finish Co. to record estimated bad debts?

$6,000 Signup and view all the answers

What entry would Lani Co. make when recording estimated bad debts based on 1% of accounts receivable?

$4,400 Signup and view all the answers

When Acel Co. previously wrote off a $400 bad debt from CTR, Inc., what would the entries to record the receipt of cash on October 21 include?

Debit to Accounts Receivable, Credit to Cash Signup and view all the answers

What entry would Avis Company record to adjust for the estimated uncollectible accounts?

Credit to Allowance for Doubtful Accounts Signup and view all the answers

What would Flash Co. record for estimated bad debts that amount to $7,500?

Debit to Bad Debts Expense in the amount of $7,500 Signup and view all the answers

What entry would Ana Co. record for estimated bad debts amounting to $500?

Debit to Bad Debts Expense in the amount of $500 Signup and view all the answers

The BLANK method uses several percentages to estimate the allowance.

Aging Signup and view all the answers

What would Yates Co. record as estimated bad debts based on 1% of sales?

$5,000 Signup and view all the answers

The BLANK method, also referred to as balance sheet method, uses balance sheet relations to estimate bad debts.

aging of accounts receivable Signup and view all the answers

What entry would DVS Company record for their adjusting entry estimating $2,500 of uncollectible accounts?

Debit to Bad Debts Expense for $2,500, Credit to Allowance for Doubtful Accounts for $2,500 Signup and view all the answers

The BLANK method of estimating bad debts uses both past and current receivables information.

aging of receivables Signup and view all the answers

The (maker/signer) of the note is the one that signed the note and promised to pay at maturity.

maker Signup and view all the answers

Match the following terms with their definitions:

Promissory note = Written promise to pay a specified amount of money Principle = Amount that the signer agrees to pay back, not including interest Interest = Charge from using money loaned from one entity to another Maker = One who signed the note and promised to pay at maturity Payee = The person to whom the note is payable Maturity date = Day that the principal and interest must be paid Signup and view all the answers

Study Notes

Receivables

Common types of receivables: Accounts Receivable and Notes Receivable.
Accounts Receivable represents amounts due from customers for goods sold on credit.
Notes Receivable is a formal written promise for a specified amount to be paid on demand or a future date.

Accounts Receivable Ledger

An accounts receivable ledger maintains a separate account for each customer, recording transactions affecting accounts receivable.

Journal Entries for Sales and Collections

Sale on credit requires a debit to Accounts Receivable.
When payment is received, a credit to Accounts Receivable reflects that the company has collected the owed amount.
For credit card sales, both Sales and Accounts Receivable accounts are debited by the transaction amount.

Bad Debts and Write-Offs

Bad debts are amounts customers failed to pay, which become an expense for the seller.
The direct write-off method records bad debts only when an account is deemed uncollectible.
The allowance method estimates uncollectible accounts before they are confirmed.

Accounting for Bad Debts

The Allowance for Doubtful Accounts is a contra asset account, with normal credit balances representing total uncollectible accounts.
Under the allowance method, bad debt expense is recorded using percentages of either sales or accounts receivable.

Interest Calculations

Interest on notes is computed using the formula: principal x interest rate x time (in fraction of a year).
Notes can have various maturity dates determined by the duration agreed upon, such as 30, 60, or 90 days.

Payment Entries for Notes

Upon maturity of a note, the company records cash received, interest revenue, and the reduction of the Notes Receivable account.
When a previously written-off account is collected, it is reinstated, and the cash receipt is recorded.

Materiality Constraint

Materiality permits the use of the direct write-off method for small amounts relative to financial statements, allowing simplified accounting practices.

Summary of Methods

Allowance Method: Matches estimated bad debt expense to related sales, increasing accuracy in financial reporting.
Direct Write-Off Method: Records bad debts only when confirmed uncollectible, potentially violating the matching principle.

Important Entries and Calculations

Entries for writing off bad debts include debiting Bad Debts Expense and crediting Accounts Receivable or Allowance for Doubtful Accounts depending on the method.
To adjust for estimated bad debts, companies calculate based on either total sales or outstanding accounts receivable balances.

Promissory Notes

A promissory note details the principal amount, interest due, maker, payee, and maturity date.
Proper documentation and accounting of promissory notes ensure clarity in receivables management.

Overall Importance

Understanding receivables and their management is crucial for maintaining accurate financial records and ensuring cash flow stability within a business.### Interest Calculation and Notes
To compute interest due on a maturity date, multiply the principal, interest rate, and the time expressed as a fraction of the year.
A note is considered honored when it is paid in full.
Journal entries for notes include debiting Notes Receivable and crediting Accounts Receivable upon receipt.

Journal Entries for Notes

If a note is honored at maturity, record cash received including principal and accrued interest.
If a note is dishonored, debit Accounts Receivable for the amount of the note plus accrued interest, reflecting the failed payment.
Adjusting entries require recognition of earned interest revenue for notes receivable at year-end.

Dishonor of Notes

A note is labeled as dishonored when the maker fails to pay at maturity.
If dishonored, companies adjust their accounts by converting the note into an Accounts Receivable account.

Interest Calculations

Interest for notes can be calculated using the formula: Interest = Principal x Rate x (Time/360).
Adjusting entries for notes may include debits to Interest Receivable for accrued interest.

Pledging and Factoring Receivables

Companies convert receivables to cash by selling them (factoring) or using them as loan security (pledging).
Factoring refers to selling receivables, while pledging means using them as collateral.
Recording a loan with pledged receivables includes a note payable and a footnote in financial statements regarding the receivables pledged.

Accounts Receivable Turnover

Accounts Receivable Turnover is calculated as Net Sales divided by Average Accounts Receivable.
A higher turnover ratio indicates effective management of receivables and cash flow efficiency.

Example Calculations

For Siu Co., accounts receivable turnover for 2010 is 4.6, calculated using 2010 Net Sales and the average of 2010 and 2009 receivables.
Companies often face factoring fees, reducing the cash received from sold receivables; for example, a 5% fee on $10,000 results in a net cash receipt of $9,500.

Miscellaneous Insights

It is crucial for companies to document any pledging of receivables for compliance with the full disclosure principle in financial reporting.
The concept of honoring or dishonoring notes is fundamental within accounting practices related to timeliness and accountability of payments.

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Description

Test your knowledge on financial notes and interest calculations with this quiz. It covers various scenarios, including due dates and interest payments. Perfect for finance students looking to reinforce their understanding of these concepts.