Question

On August 1, year 1, Hampton Construction received a 9 percent, 6-month note receivable from Dusty Roads, one of Hampton Construction’s problem credit customers. Roads had owed $33,100 on an outstanding account receivable. The note receivable was taken in settlement of this amount. Assume that Hampton Construction makes adjusting entries for accrued interest revenue once each year on December 31.

Record the receipt of the note on August 1 in settlement of the account receivable.

Record accrued interest at December 31, year 1.

Assume that Dusty Roads pays the note plus accrued interest in full. Record the collection of the principal and interest on January 31, year 2.

Assume that Dusty Roads did not make the necessary principal and interest payment on January 31, year 2. Rather, assume that he defaulted on his obligation. Record the default on January 31, year 2.

a. Journalize the above four events on the books of Hampton Construction.

b. Indicate the effects of each of the four transactions journalized in part a on the elements of the financial statement shown below. Use the code letters I for increase, D for decrease, and NE for no effect.

Answer 1

Date	Account	debit	credit
case1
1	Note receivable	33100
	accounts receivable		33100
	[being note received for amount owed]
2 -31 dec	Interest receivable	1241.25
	Interest revenue		1241.25
	[being interest accrued for 5 months][33100*.09*5/12]
3-jan31	cash	34589.5
	Note receivable		33100
	Interest receivable		1241.25
	Interest revenue [33100*.09*1//12]		248.25
	[being note collected]
case 2
31JAn	Accounts receivable	34589.5
	Interest receivable		1241.25
	note receivable		33100
	Interest revenue		248.25

b)

	Asset	=Liabilities	+equity
1	+33100 (note receivable) -33100 (accounts receivable) NE	NE	NE
2	+ 1489.5 (interest receivable) I	NE	+1489.5   NE (revenue)
3	+34589.5 (cash) I -1489.5 (interest receivable) -33100 (note receivable)		+248.25 (revenue) I
4	+34589.5 (accounts receivable) -1489.5 (interest receivable) -33100 (note receivable)   I		+248.25   I (revenue)