There are many different ways to calculate interest

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Survey of Accounting
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Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
Expert Verified
rate of interest. There aremany different ways to calculate interest. The time factor in the formula inIllustration 8-13 expresses the fraction of a year that the note is outstanding.Whenthe maturity date is stated in days, the time factor is often the number of daysdivided by 360.When the due date is stated in months, the time factor is the numberof months divided by 12. Illustration 8-14 shows computation of interest for varioustime periods.The computation above assumed 360 days for the length of the year. Financialinstruments actually use 365 days. In order to simplify calculations in our illustra-tions, we have assumed 360 days.For homework problems, assume 360 days.Recognizing Notes ReceivableTo illustrate the basic entry for notes receivable, we will use the $1,000,two-month, 12% promissory note on page 369. Assuming that CalhounCompany wrote the note to settle an open account, Wilma Companymakes the following entry for the receipt of the note.Explain how companies recognizenotes receivable.S T U D Y O B J E C T I V E 6May 1Notes Receivable1,000Accounts Receivable—Calhoun Company1,000(To record acceptance of Calhoun Company note)The company records the note receivable at its face value, the amount shownon the face of the note. No interest revenue is reported when the note is accepted,because the revenue recognition principle does not recognize revenue untilearned. Interest is earned (accrued) as time passes.If a company lends money using a note, the entry is a debit to Notes Receivableand a credit to Cash in the amount of the loan.Valuing Notes Receivable
Illustration 8-13Formula for computing interestIllustration 8-14Computation of interestDescribe how companies valuenotes receivable.S T U D Y O B J E C T I V E 7H E L P F U L H I N TThe interest rate speci-fied is the annualrate.Cash Flowsno effectASEL1,0001,000AnnualTime inFace ValueInterestTerms ofInterestof NoteRateOne YearTerms of NoteInterest ComputationFaceRate Time Interest$730, 18%, 120 days$73018%120/360 $ 43.80$1,000, 15%, 6 months$1,000 15%6/12$ 75.00$2,000, 12%, 1 year$2,000 12%1/1$240.00JWCL165_c08_356-395.qxd 8/4/09 7:22 PM Page 371
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Survey of Accounting
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Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
Expert Verified
receivable at their cash (net) realizable value.The notes receivable allowance ac-count is Allowance for Doubtful Accounts.The estimations involved in determin-ing cash realizable value and in recording bad debts expense and the related al-lowance are done similarly to accounts receivable.Disposing of Notes ReceivableNotes may be held to their maturity date, at which time the maker mustpay the face value plus accrued interest. Sometimes the maker of the notedefaults and the payee must make an adjustment to the accounts.At othertimes the holder of the note speeds up the conversion to cash by selling thenote receivable.HONOR OF NOTES RECEIVABLEA note is honoredwhen its maker pays it in full at its maturity date. For aninterest-bearing note, the amount due at maturity is the face value of the note

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