Question

Exercise 5-17A Record notes receivable and interest revenue (LO5-7) 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 $600,000 to its supplier using a 12-month, 11% note. Required: The loan of $600,000 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. Record the above transactions for Shoemaker Corporation. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

Shoemaker Corporation should record the issuance of a note receivable and cash disbursement on April 1, 2021, the accrual of interest income on December 31, 2021, and the collection of the note and interest on April 1, 2022.

Step-by-step explanation:

When Shoemaker Corporation lends $600,000 to its supplier with an 11% note receivable, three different accounting events need to be recorded:

Issuing the note receivable on April 1, 2021:

Dr. Notes Receivable $600,000

Cr. Cash $600,000

Accrued interest income on December 31, 2021:

(Interest for 9 months = $600,000 × 11% × 9/12 = $49,500)

Dr. Interest Receivable $49,500

Cr. Interest Revenue $49,500

Collection of the note and interest on April 1, 2022:

(Total interest for 12 months = $600,000 × 11% = $66,000)

Dr. Cash $666,000 (Note amount + full interest)

Cr. Notes Receivable $600,000

Cr. Interest Receivable $49,500

Cr. Interest Revenue $16,500 (To record the remaining interest income for 3 months)

Answer 2

The Journal entries are as follows:

(a) On April 1, 2021

Notes receivable A/c Dr. $600,000

To Cash A/c $600,000

(To record loan given)

(b) On December 31, 2021

Interest receivable ($600,000 × 11% × 9/12) A/c Dr. $49,500

To Interest revenue $49,500

(To record accrued interest)

(c) On April 1, 2022

Cash A/c Dr. $666,000

To Notes receivable $600,000

To Interest receivable $49,500

To Interest revenue $16,500

(To record collection)

Notes:

Interest revenue on April 1, 2022:

= 11% of loan amount for 12 months - Accrued interest

= 0.11 × $600,000 - $49,500

= $66,000 - $49,500

= $16,500