Question

On August 1, 2021, Trico Technologies, an aeronautic electronics company, borrows $21 million cash to expand operations. The loan is made by FirstBanc Corp. under a short-term line of credit arrangement. Trico signs a six-month, 9% promissory note. Interest is payable at maturity. FirstBanc Corp.’s year-end is December 31. Required: 1.-3. Record the necessary entries in the Journal Entry Worksheet below for FirstBanc Corp. Record the acceptance of note.

Answer 1

On acceptance of note:

Debit Note receivable $21,000,000

Credit Cash $21,000,000

(Recognition of note receivable)

As at Dec 31:

Debit Interest receivable $787,500

Credit Interest revenue $787,500

(Recognition of interest accrual at Dec 31)

As at Feb 1 - collection of notes receivable:

Debit Cash $21,945,000

Credit Note receivable $21,000,000

Credit Interest receivable $945,000

(Collection of note receivable and interest)

Step-by-step explanation:

Note is a promissory note with a written agreement made by the borrower to the lender (payee) to pay a certain, specific sum at a specified date.

Interest revenue on the note is calculated as: Principal x Interest Rate x Time

The total interest revenue is $21,000,000 x 9%/12 x 6 months = $945,000.

Monthly interest revenue is therefore $945,000 / 6 months = $157,500.

Total interest as at December 31, 2021 (Aug 1 - Dec 31): $157,500 x 5 months = $787,500.