Answer:
4/1/22: Dr Notes Receivable x
Cr Cash x
(to record the acceptance of $x from Goodwin Company's note)
7/1/22: Dr Notes Receivable 22,000
Cr Cash 22,000
( to record the acceptance of $22,000 from Slocombe notes)
12/31/22: Dr Interest Receivable (x x 8%) x (9 : 12)
Cr Interest Income (x x 8%) x (9 : 12)
(to record interest accured from Goodwin Company's note)
Dr Interest Receivable 1,210
Cr Interest Income 1,210
(to recored interest accured from Slocombe notes which is calculated as: 22,000 x 11% x (6/12) =1,210)
4/1/23: Dr Cash x
Cr Notes Receivable x
(to record collection of principle from Goodwin's note)
Dr Cash ( x x 8%)
Cr Interest Receivable (x x 8%) x (9 : 12)
Cr Interest Income (x x 8%) x (3 :12)
(to record interest income receipt on termination of Goodwin's note)
For Slocombe's notes, as Kingbird expects it will eventually collect, at 4/1/23, although Slocombe's note is due yet not paid, Kingbird does not book provision for bad debt regarding to this note. Besides, the income earned but not yet received in 2023 from holding this note will not be recorded because the adjusting entries once a year on December 31 and in fact it is not paid yet ( together with the note's principal amount).
Explanation:
The explanations have been given following each entry in the answer. Beside the rules of double entries in accounting, accural accounting has to be well-understood in order to answer this question right. Accrual accounting is the accounting which records incomes/expenses when they are earned/incurred, rather than when they are received/paid.
Thus, the interest income has been earned from the very first day holding the two companies' notes has to be recorded (accured) at the end of the year 2022 rather than when it is received in order to accurately reflect the business result of the year 2022. At this point, a simple calculation ( as shown in the answer) needs to be done to determine an accurate amount of interest income to be booked for 2022.
