Question

Problem# 5 (20 points) The following series of transactions occurred during Year 1 and Year 2, when Linwood Co. sold merchandise to John Moore. Linwood's annual accounting period ends on December 31. 10/01/Yr 1 Sold $12,000 of merchandise to John Moore, terms 2/10, n/30. 11/15/Yr 1 Moore reports that he cannot pay the account until early next year. He agrees to exchange the account for a 120-day, 12% note receivable. 12/31/Yr 1 Prepared the adjusting journal entry to record accrued interest on the note. 03/15/Yr 2 Linwood receives a check from Moore for the maturity value (with interest) of the note. 03/22/Yr 2 Linwood receives notification that Moore's check is being returned for nonsufficient funds (NSF). 12/31/Yr 2 Linwood writes off Moore's account as uncollectible. Prepare Linwood Co.'s journal entries to record the above transactions. The company uses the allowance method to account for its bad debt expense.

Is this correct?

Answer 1

Journal of Linwood Co.

Date	Account Tittle	Debit	Credit
Year 1
Oct. 1	Account Receivable	12,000
	Sales		12,000
	To record sales on account
Nov. 15	Note Receivable	12,000
	Account Receivable		12,000
	To record receipt of N/R for 120 days
Dec. 31	Interest Receivable	184
	Interest Revenue		184
	To record accrued interest for 46 days ending
	at the end of accounting period Dec. 31, Yr. 1.
Yr 2
Mar. 15	Cash	12,480
	Note Receivable		12,000
	Interest Receivable		184
	Interest Revenue		296
	To record honor of N.R on maturity date
Mar. 22	Account Receivable	12,480
	Cash		12,480
	To record dishonor of NR including interest
Dec. 31	Allowance for doubtful Accounts	12,480
	Account Receivable		12,480
	To record writing off bad debt

Notes:

Accrued Interest at the end of accounting period, Yr. 1 = 12,000 $\times$ 12% $\times$ 46/360 = $184

Maturity Value = Face Value + Interest = 12,000 + 12,000 $\times$ 12% $\times$ 120/360 = 12,000 + 480 = 12,480

Note: The working done in the image is correct with respect to accrued period interest and maturity period interest.

The 15 March is maturity date where 120 days are completed from the date of Receiving NR.