Question

The Stridewell Wholesale Shoe Company manufacturers athletic shoes that it sells to retailers. On May 1, 2021, the company sold shoes to Harmon Sporting Goods. Stridewell agreed to accept a $700,000, 6-month, 12% note in payment for the shoes. Interest is receivable at maturity. What is the entry for May 1 and November 1 (6 months after)? What if the sale occurred on August 1 instead of May 1?

Answer 1

The question involves making journal entries for a notes receivable on May 1 and its collection with interest on November 1. If the transaction occurred on August 1, the entries would be the same except for the dates.

Step-by-step explanation:

The student's question involves accounting for notes receivable and interest income. On May 1, when Stridewell Wholesale Shoe Company sells shoes to Harmon Sporting Goods on a 6-month, 12% note for $700,000, Stridewell would make the following journal entry:

• Debit Notes Receivable $700,000
• Credit Sales Revenue $700,000

This entry records the sale and recognizes the note receivable. On November 1, upon the note's maturity, the entry to record the collection of the note including interest is:

• Debit Cash $742,000
• Credit Notes Receivable $700,000
• Credit Interest Income $42,000

Interest is calculated as $700,000 * 12% * (6/12) = $42,000. If the sale had occurred on August 1 instead, the entries on August 1 would be the same as on May 1. The collection on February 1 (6 months later) would also be the same, with the only difference being the date.