Question

The following selected transactions are from Springer Company.

2016

Nov. 1 Accepted a \(4,800, 90-day, 8% note dated this day in granting Steve Julian a time extension on his past-due account receivable.

Dec. 31 Made an adjusting entry to record the accrued interest on the Julian note.

2017

Jan. 30 Received Julian’s payment for principal and interest on the note dated November 1.

Feb. 28 Accepted a \)12,600, 30-day, 8% note dated this day in granting a time extension on the pastdue account receivable from King Co.

Mar. 1 Accepted a \(6,200, 60-day, 12% note dated this day in granting Myron Shelley a time extension on his past-due account receivable.

30 The King Co. dishonored its note when presented for payment.

Apr. 30 Received payment of principal plus interest from M. Shelley for the March 1 note.

June 15 Accepted a \)2,000, 72-day, 8% note dated this day in granting a time extension on the past-due account receivable of Ryder Solon.

21 Accepted a $9,500, 90-day, 8% note dated this day in granting J. Felton a time extension on his past-due account receivable.

Aug. 26 Received payment of principal plus interest from R. Solon for the note of June 15.

Sep. 19 Received payment of principal plus interest from J. Felton for the June 21 note.

Nov. 30 Wrote off King’s account against Allowance for Doubtful Accounts. Required.

1. Prepare journal entries to record these transactions and events. (Round amounts to the nearest dollar.)

Analysis Component

1. What reporting is necessary when a business pledges receivables as security for a loan and the loan is still outstanding at the end of the period? Explain the reason for this requirement and the accounting principle being satisfied.

Short answer

1. While accepting the note, Notes receivable are debited, and the accounts receivable are credited.
2. Due to the full disclosure principle, a requirement arises to show the accounting treatment of receivables pledged as a security of the loan in the footnotes.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Notes Receivable

Notes receivable refers to a written promissory notewith a specified sum and date toreceive the specified sum from the debtors in the future.

Journal entries

For 2016

Date	Particulars	Debit ($)	Credit ($)
2016
Dec 16	Notes receivables	4,800
	Accounts receivables		4,800
	(To record the acceptance of note)
Dec 31	Interest receivables	64
	Interest revenue $\left(\$4,800\times 8\%\times \frac{60}{360}\right)$		64
	(To record the interest)

For 2017

Date	Particulars	Debit ($)	Credit ($)
Jan 30	Cash	4,896
	Interest receivables		64
	Interest revenue		32
	Note receivable		4,800
	(To record the collection of cash)
Feb 28	Notes receivables- King Co.	12,600
	Accounts receivables—King Co		12,600
	(To record the acceptance of note)
Mar 1	Notes receivables—Myron Shelley	6,200
	Accounts receivables—Myron Shelley		6,200
	(To record the acceptance of note)
Mar 30	Accounts receivables—King Co	12,684
	Interest revenue $\left(\$12,600\times 8\%\times \frac{30}{360}\right)$		84
	Note receivable—King Co		12,600
	(To record the accounts receivable)
Apr 30	Cash	6,324
	Interest revenue $\left(\$6,200\times 12\%\times \frac{60}{360}\right)$		124
	Notes receivable		6,200
	(To record the cash collection)
Jun 15	Notes receivables—Ryder Solon	2,000
	Accounts receivable—Ryder Solon		2,000
	(To record the note receivable)
Jun 21	Notes receivables—J. Felton	9,500
	Accounts receivable—J. Felton		9,500
	(To record the note receivable)
Aug 26	Cash	2,032
	Interest revenue $\left(\$2,000\times 8\%\times \frac{72}{360}\right)$		32
	Notes receivable—R. Solon		2,000
	(To record the cash collection)
Sep 19	Cash	9,690
	Interest revenue $\left(\$9,500\times 8\%\times \frac{90}{360}\right)$		190
	Notes receivable—J. Felton		9,500
	(To record the cash collection)
Nov 30	Allowance for doubtful accounts	12,684
	Accounts receivables- King Co.		12,684
	(To record the allowance)

Necessary reporting

When an organization pledges its accounts receivables as security for a loan and the outstanding loan amount, a footnote is to be prepared along with the financial statements. Further, an organization is required to disclose their information about the notes receivables while preparing the books of accounts at the end of the period.

The requirement to show the accounts receivable as a security for a loan arises due to the full disclosure principle as this principle states that a business entity should reveal all the necessary information related to the business in its financial statements.