On April 1, Year 1, a company realizes that one of its main suppliers is having difficulty meeting delivery schedules, which is hurting the company's business. The supplier explains that it has a temporary lack of funds that is slowing its production cycle. The company agrees to lend $470,000 to its supplier using a 12-month, 11% note.
Record the following transactions for Shoemaker Corporation.
1. The loan of $470,000 and acceptance of the note receivable on April 1, Year 1 (If not entry is required for a transaction/event, select 'No journal entry required' in the first account field.)
2. The adjustment for accrued interest on December 31, Year 1. (If not entry is required for a transaction/event, select 'No journal entry required' in the first account field.)
3. Cash collection of the note and interest on April 1, 2002 (If not entry is required for a transaction/event, select 'No journal entry required' in the first account field.)

1.

April 1, Year 1    Note Receivable                470000 Dr

                               Cash                                      470000 Cr

2.

December 31, Year 1    Interest receivable          38775 Dr

                                              Interest Revenue            38775 Cr

3.

April 1, Year 2        Cash                                 521700 Dr

                                    Note Receivable               470000 Cr

                                    Interest Receivable           38775 Cr

                                    Interest Revenue               12925 Cr

Explanation:

1.

The loan was extended on 1 April Year. The note received is an asset for the company and will be recorded as a debit to the note receivable account and a credit to cash as cash is being paid as an extension of loan to the supplier.

2.

The accrual principle states that the revenues and expenses relating to a particular period should be matched and recorded in their respective periods. Thus, on 31 December Year 1, the interest revenue relating to notes receivable for the period from April to December (9 months) will be recorded as a revenue and as a receivable as it will be received when the note matures.

Interest revenue = 470000 * 0.11 * 9/12 = 38775

3.

The amount for the loan and interest on it against the note receivable will be received on April 1 Year 2. The cash will be debited by the amount of note receivable and the interest revenue earned for 12 months on that note. The note receivable account and the interest receivable account will be credited which were assets and the interest revenue that relates to year 2 (3 months from January to march) will be credited against the cash.

Interest revenue Year 2 = 470000 * 0.11 * 3/12 = 12925

Cash = 470000 + 38775 + 12925   = 521700