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 $420,000 to its supplier using a 12-month, 12% note.

Required:
1. The loan of $420,000 and acceptance of the note receivable on April 1, 2021
2. The adjustment for accrued interest on December 31, 2021
3. Cash collection of the note and interest on April 1, 2022.
Record the above transactions for Shoemaker Corporation.

Answer 1

1.

April 1, 2021

Note Receivable $420000 Dr

Cash $420000 Cr

2.

December 31, 2021

Interest Receivable $37800 Dr

Interest Revenue $37800 Cr

3.

March 31, 2022

Interest Receivable $12600 Dr

Interest Revenue $12600 Cr

April 1, 2022

Cash $470400 Dr

Note Receivable $420000 Cr

Interest Receivable $50400 Cr

Step-by-step explanation:

1.

The issuance of notes creates an asset in the books of Shoemaker and the note receivable is debited by the amount of the loan. In exchange, cash is paid out as loan and thus it is credited.

2.

Following accrual principle, the interest revenue related to year 2021, is recorded on 31 December 2021 and a receivable is created against it as the interest revenue has not been received on 31 December 2021. The amount of interest revenue will be,

Interest Revenue - 31 December 2021 = 420000 * 12% * 9/12 = $37800

The loan was issued on 1 April and 9 months interest has been earned till 31 December 2021.

3.

On 30 March 2022, the remaining three months interest revenue will be recorded against a receivable. The amount will be ,

Interest Revenue - March 2022 = 420000 * 12% * 3/12 = $12600

On 1 April, cash will be received for 420000 Principal and 50400 (37800 + 12600) (37800 + 12600 interest and it will be recorded as debit to cash for 470400 and credit to notes receivable for 420000 and interest receivable to 50400.