current-assets-part-ii

But for simplicity it is not uncommon for the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: for simplicity, it is not uncommon for the interest calculation to be based on a presumed 360-day year or 30-day month. This presumption probably has its roots in olden days before electronic calculators, as the resulting interest calculations are much easier with this assumption in place. But, with today’s technology, there is little practical use for the 360 day year, except that it tends to benefit the creditor by producing a little higher interest amount -- caveat emptor (Latin for “let the buyer beware”)! The following illustrations will preserve this archaic approach with the goal of producing nice round numbers that are easy to follow. 4.1 Accounting for Notes Receivable To illustrate the accounting for a note receivable, assume that Butchko initially sold $10,000 of merchandise on account to Hewlett. Hewlett later requested more time to pay, and agreed to give a formal three-month note bearing interest at 12% per year. The entry to record the conversion of the account receivable to a formal note is as follows: 6-1-X8 Notes Receivable 10,000 Accounts Receivable *** 10,000 To record conversion of an account receivable to a note receivable When the note matures, Butchko’s entry to record collection of the maturity value would appear as follows: 8-31-X8 Cash 10,300 Interest Income *** 300 Notes Receivable 10,000 To record collection of note receivable plus accrued interest of $300 ($10,000 X 12% X 90/360) Download free ebooks at bookboon.com 18 Notes Receivable Current Assets: Part II 4.2 A Dishonoured Note If Hewlett dishonored the note at maturity (i.e., refused to pay), then Butchko would prepare the following entry: 8-31-X8 *** Accounts Receivable 10,300 Interest Income 300 Notes Receivable 10,000 To record dishonor of note receivable plus accrued interest of $300 ($10,000 X 12% X 90/360) The debit to Accounts Receivable in the above entry reflects the hope of eventually collecting all amounts due, including the interest, from the dishonoring party. If Butchko anticipated some difficulty in collecting the receivable, appropriate allowances would be established in a fashion similar to those illustrated earlier in the chapter. your chance Please click the advert to change the world Here at Ericsson we have a deep rooted belief that the innovations we make on a daily basis can have a profound effect on making the world a better place for people, business and society. Join us. In Germany we are especially looking for graduates as Integration Engineers for • Radio Access and IP Networks • IMS and IPTV We are looking forward to getting your application! To apply and for all current job openings please visit our web page: www.ericsson.com/careers Download free ebooks at bookboon.com 19 Notes Receivable Current Assets: Part II 4.3 Notes and Adjusting Entries In the above illustrations for Butchko, all of the activity occurred within the same accounting year. However, if Butchko had a June 30 accounting year end, then an adjustment would be needed to reflect accrued interest at year-end. The appropriate entri...
View Full Document

This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

Ask a homework question - tutors are online