Question

Refer to the information in Exercise 7-11 and prepare the journal entries for the following selected transactions of Danica Company for 2017. 2017

Jan. 27 Received Lee’s payment for principal and interest on the note dated December 13.

Mar. 3 Accepted a \(5,000, 10%, 90-day note dated March 3 in granting a time extension on the past-due account receivable of Tomas Company.

17 Accepted a \)2,000, 30-day, 9% note dated March 17 in granting H. Cheng a time extension on his past-due account receivable.

Apr. 16 Cheng dishonored his note when presented for payment.

May 1 Wrote off the Cheng account against the Allowance for Doubtful Accounts.

June 1 Received the Tomas payment for principal and interest on the note dated March 3.

Short answer

Dishonor of notes receivable is when the note's issuer is unable to pay the particular sum of money as prescribed under the note on its due date.This type of note is non-negotiable.

Step-by-step solution

Journal entry

Date	Particulars	Debit	Credit
Jan 27	Cash	$9,595
	Interest income		$57
	Interest receivables		$38
	Notes receivables		$9,500
	(To record the interest of note)
Mar 3	Notes receivables	$5,000
	Accounts receivables		$5,000
	(To record the note acceptance)
Mar 17	Note receivables	$2,000
	Accounts receivables		$2,000
	(To record the receipt of note)
Apr 16	Accounts receivables	$2,015
	Note receivables		$2,000
	Interest income		$15
	(To record the note dishonor)
May 1	Allowance for doubtful accounts	$2,015
	Accounts receivables		$2,015
	(To record the accounts receivables written-off)
Jun 1	Cash	$5,125
	Interest income		$125
	Note receivable		$5,000
	(To record the note collection)

Working notes

Calculation of interest income as on January 27

$\begin{array}{rcl}\mathrm{Interest}\mathrm{income}& =& \mathrm{Face}\mathrm{value}\mathrm{of}\mathrm{note}\times \mathrm{Rate}\mathrm{of}\mathrm{interest}\times \frac{\mathrm{Number}\mathrm{of}\mathrm{days}}{360}\\ & =& \$9,500\times \frac{8}{100}\times \frac{27}{360}\\ & =& \$57\end{array}$

Calculation of interest income as on April 16

$\begin{array}{rcl}\mathrm{Interest}\mathrm{income}& =& \mathrm{Face}\mathrm{value}\mathrm{of}\mathrm{note}\times \mathrm{Rate}\mathrm{of}\mathrm{interest}\times \frac{\mathrm{Number}\mathrm{of}\mathrm{days}}{360}\\ & =& \$2,000\times \frac{9}{100}\times \frac{30}{360}\\ & =& \$15\end{array}$

Calculation of interest income as on June 01

$\begin{array}{rcl}\mathrm{Interest}\mathrm{income}& =& \mathrm{Face}\mathrm{value}\mathrm{of}\mathrm{note}\times \mathrm{Rate}\mathrm{of}\mathrm{interest}\times \frac{\mathrm{Number}\mathrm{of}\mathrm{days}}{360}\\ & =& \$5,000\times \frac{10}{100}\times \frac{90}{360}\\ & =& \$125\end{array}$