Question

Problem 2(20 points) On September 1, 2018, Smit Co. received a 12%, six-month note receivable in settlement of accounts receivable of $320,000. Smit Co. insists that any customer who fails to pay an account receivable when due must replace their unpaid account receivable with an interest-bearing note receivable. Assume the company makes adjusting entries for accrued interest revenue once a year on December 31. Journalize the following events on the books of Smit Co.: 1. Record the receipt of the note on September 1 in settlement of the account receivable. (4 points 2. Record accrued interest at December 31, 2018. (4 points) 3. Assume that the note and interest are paid in full at maturity. Record the collection of the principala interest on March 1, 2019. (5 points) A Assume that on 1 March 2018, the maker of the note defaults and Smit Co. does not collect the nole and interest. Record the default on March 1, 2019. (4 points) Why does Smit Co. insist that any customer who falls to pay must replace their unpaid account receivable with an interest-bearing note receivable? (3 points)

Answer 1

1 to 3

Date	Particulars	Dr	Cr	Remarks
1-Sep	Note Receivable	$320,000
	Accounts Receivable		$320,000
	(To record receipt of notes @ 12% six month period in settlement of accounts receivable)
31-Dec	Interest on Notes Receivable	$12,800
	Interest Income		$12,800
	(To record interest at 12% on Notes of $320,000 for 4 moths)
1-Mar	Bank	$339,200
	Note Receivable		$320,000	Principal balance on Notes
	Interest on Notes Receivable		$12,800	Accrued Interest for 4 month
	Interest Income		$6,400	Interest due on Maturity for 2 months
	(To record receipt of amount due on notes receivable)

4.

Date	Particulars	Dr	Cr	Remarks
1-Mar	Allowance for Doubtfull Receivable	$332,800
	Note Receivable		$320,000	Principal balance on Notes
	Interest on Notes Receivable		$12,800	Accrued Interest for 4 month
	(To record writeoff of amount due on notes receivable)

5. Accepting Notes receivable with interest makes Smith & Co receive additional interest on accounts receivable balance.