Question

Prepare journal entries to record these selected transactions for Vitalo Company (assume that no reversing entries are recorded).

Nov. 1 Accepted a $6,000, 180-day, 8% note dated November 1 from Kelly White in granting a time extension on her past-due account receivable.

Dec. 31 Adjusted the year-end accounts for the accrued interest earned on the White note.

Apr. 30 White honored her note when presented for payment; February has 28 days for the current year.

Short answer

The amount of interest revenue on the notes receivablescan be calculated by multiplying the rate of interest and thenote's duration will its respective principal value.

Step-by-step solution

Journal entries

Date	Particulars	Debit	Credit
Nov 1	Notes receivables- Kelly White	$6,000
	Accounts receivables		$6,000
	(To record the note acceptance)
Dec 31	Interest receivables	$80
	Interest revenue		$80
	(To record the interest)
Apr 30	Cash	$6,240
	Notes receivables		$6,000
	Interest revenue		$160
	Interest receivables		$80
	(To record the note dishonored)

Working notes

Calculation of interest receivables from November 1 till its maturity

$\begin{array}{rcl}\mathrm{Interest}\mathrm{receivables}& =& \mathrm{Face}\mathrm{value}\times \mathrm{Rate}\mathrm{of}\mathrm{interest}\times \frac{\mathrm{Number}\mathrm{of}\mathrm{days}}{360}\\ & =& \$6,000\times \frac{8}{100}\times \frac{60}{360}\\ & =& \$80\end{array}$

Calculation of interest revenue from January 1 till its maturity

$\begin{array}{rcl}\mathrm{Interest}\mathrm{revenue}& =& \mathrm{Face}\mathrm{value}\times \mathrm{Rate}\mathrm{of}\mathrm{interest}\times \frac{\mathrm{Number}\mathrm{of}\mathrm{days}}{360}\\ & =& \$6,000\times \frac{8}{100}\times \frac{120}{360}\\ & =& \$160\end{array}$