Question

On April 1, 2021, Shoemaker Corporation realizes that one of its main suppliers is having difficulty meeting delivery schedules, which is hurting Shoemaker's business. The supplier explains that it has a temporary lack of funds that is slowing its production cycle. Shoemaker agrees to lend $500,000 to its supplier using a 12-month, 12% note. Required: The loan of $500,000 and acceptance of the note receivable on April 1, 2021. The adjustment for accrued interest on December 31, 2021. Cash collection of the note and interest on April 1, 2022.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

1.  Notes receivable A/c Dr $500,000

           To Cash A/c                               $500,000

(Being the notes receivable acceptance is recorded)

2. Interest receivable A/c Dr $45,000

       To Interest revenue                       $45,000

(Being the interest is collected)

Interest = Principal × rate of interest × number of months ÷ (total number of months in a year)

= $500,000 × 12% × (9 months ÷ 12 months)

= $45,000

The 3 months is calculated from April 1 to December 31

3.  Cash A/c Dr $560,000

              To Notes receivable A/c $500,000

              To  Interest receivable A/c $45,000

              To Interest revenue A/c      $15,000

(Being cash collected recorded)

Interest revenue = Principal × rate of interest × number of months ÷ (total number of months in a year)

= $500,000 × 12% × (3 months ÷ 12 months)

= $15,000

The 3 months is calculated from December 31 to April 1