Financial Accounting: Assets
Question 1 (30 marks)
Multiple choice (1 mark each)
a. What is the most important internal control with respect to cash?
1)
2)
3)
4)
All bank accounts should be reconciled monthly.
Small cash payments should only be made through an imprest petty cash fund.
The duties of handling cash and accounting for cash should be segregated.
The accountant should always make the cash deposits to the bank.
b. Under what circumstances would cash not be reported as a current asset on the
balance sheet?
1)
2)
3)
4)
When the cash is held in a foreign currency bank account.
When the cash is held in the petty cash box.
The cash is held in a sinking fund for the repayment of bonds payable in five
years.
The company plans to use all of its cash to acquire new manufacturing
equipment in two months time.
c. Why is the direct write-off method of accounting for bad debts expense generally not
acceptable?
1)
2)
3)
4)
It is not reliable.
It recognizes the bad debt expense in the same period that the related sale was
made in.
It is difficult to estimate the amount of the bad debt expense.
It violates the matching principle.
d. Which of the following method(s) will generate cash from accounts receivable?
1)
2)
3)
4)
Assignment
Factoring
Yes
Yes
No
No
No
Yes
Yes
No
e. What does it mean when accounts receivable are sold to a factor without recourse?
1)
2)
3)
4)
The factor assumes the risk for uncollectible accounts.
The risk of uncollectible accounts is retained by the selling company.
The selling company usually receives face value for the sale to the factor.
The selling company agrees not to sell nay more goods on account to those
customers whose accounts have been sold.
f. A company recently purchased two computers. The consideration for the first
computer was a one-year, 8% note payable, with a face value of €4,000 (8% is the
current market rate of interest for loans of this type). The consideration for the second
computer was a one-year non-interest bearing note with a face value of €4,320.
Which of the following statements is true?
1)
2)
3)
4)
The total amount of cash that will be paid for each computer is €4,000.
Both computers will be recorded at the same cost.
The cost of the computer purchased with the non-interest bearing note payable
will be higher than the costs assigned to the other computer.
The cost assigned to the computer purchased with the 8% note payable will be
higher than the cost assigned to the other computer.
g. Which of the following would indicate that a note receivable or other loan is
impaired?
1)
2)
3)
4)
When it is written off.
When the maker of the note experiences financial difficulty.
When it is probable that principal repayments will be delayed.
When the market value of the note falls below its book value due to interest
rate changes.
h. A company has €28,000 in its bank account at December 31 and an imprest petty
cash fund of €500 at December 31. What cash balance should be reported on the
company’s December 31 balance sheet?
1)
2)
3)
4)
€27,500
€28,500
€28,000
€500
i. How is a deposit in transit reflected on a bank reconciliation prepared in a format
showing the correct balance in the general ledger?
1)
2)
3)
4)
Subtracted from balance per bank
Subtracted from balance per books
Added to balance per books
Added to balance per bank
j. After preparing the year end bank reconciliation, what cash balance should be
reported on the company’s balance sheet?
1)
2)
3)
4)
The cash balance in the general ledger account prior to reconciliation
The cash balance on the year end bank statement
The reconciled cash balance per the bank reconciliation
The sum of the outstanding cheques and deposits in transit
(2 marks each)
k. The following information pertains to Apricot Ltd., a fruit wholesaler, at
December 31, year 1:
Bank Statement balance
Cash general ledger balance
Deposits in transit
Outstanding cheques
€ 40,000
56,000
20,000
4,000
Assuming that there are no other reconciling items, at what amount should Apricot’s
cash balance be reported on its December 31, year 1 balance sheet?
1)
€36,000
2)
3)
4)
€40,000
€56,000
€60,000
l. A company has a €200 imprest petty cash fund. It is replenished, and expenses
recorded, at the end of each month or sooner if necessary. At the end of the current
month there are receipts totalling €164 and remaining cash of €34. Which of the
following is true with respect to the journal entry to replenish the petty cash fund?
1)
2)
3)
4)
The journal entry will include a debit to petty cash of €166.
The journal entry will include a credit to cash of €166.
The journal entry will include a credit to cash over of €2.
The journal entry will include a debit to expenses of €34.
m. The following information was obtained to assist you in preparing the bank
reconciliation at December 31, 20X5:
Balance per bank statement, December 31, 20X5
NSF cheque returned with bank statement
Deposits in transit, December 31, 20X5
Outstanding cheques, December 31, 20X5
Bank service charge
€ 97,850
900
10,000
13,000
40
What should be the correct adjusted balance in the cash account at December 31,
20X5?
1)
2)
3)
5)
€95,710
€94,850
€93,950
€93,910
n. Teal Inc. is preparing its December 31 bank reconciliation. It has gathered the
following information so far:
Per General ledger cash account
Cheques written in December
Deposits made in December
€ 36,750
50,500
Per bank statement
Cheques cleared in December
Deposits received in December
€ 36,200
49,000
In addition, the November bank reconciliation showed outstanding cheques €1,840
and deposits in transit of €2,400.
What is the amount of outstanding cheques at December 31?
1)
2)
3)
4)
€ 36,200
€ 2,050
€ 2,390
€ 1,290
o. On July 3, 20X4, MET Company (MET) sold goods for €1,000, subject to terms of
2/10, n/30. The customer returned €200 of defective goods on July 5, and paid the
amount due on July 12. Which of the following would be included in MET’s entry on
July 12 (assuming the gross method) to record the cash receipt?
1)
2)
3)
4)
Credit to accounts receivable for €784
Credit to accounts receivable for €800
Credit to accounts receivable for €980
Credit to accounts receivable for €1,000
p. PRES Ltd. (PRES) estimates its bad debt expense by using a percentage of credit
sales. In 20X7, the bad debt estimate was €3,800. In 20X6, the estimate was €3,500.
During 20X7, PRES wrote off €3,000 of specific accounts and recovered €160 of
accounts that had been previously written off as uncollectible. At the end of 20X7,
the balance in the Allowance for doubtful accounts account was €2,500. What was
the balance in the Allowance for doubtful accounts account at the beginning of
20X7?
1)
2)
3)
4)
€ 1,540
€ 1,700
€ 3,460
€ 3,500
q. Before year-end adjusting entries, Brussels Inc’s. account balances for December 31,
2005, for accounts receivable and the related Allowance for doubtful accounts, were
€800,000 and €45,000, respectively. An aging of Accounts receivable indicated that
€62,500 of the December 31 receivables is expected to be uncollectible. What is the
net realizable value of Accounts receivable after adjustment?
1)
2)
3)
4)
€782,500
€737,500
€692,500
€755,000
r. During the year, Kabuki Inc. made an entry to write off a €3,000 uncollectible
account. Before this entry was made, the balance in accounts receivable was €40,000
and the balance in the Allowance account was €3,400 credit. What was the net
realizable value of accounts receivable after the write-off entry?
1)
2)
3)
4)
€40,000
€39,600
€33,600
€36,600
s. On January 1, year 1, Turnip Ltd. sold goods to Parsnip Inc. Parsnip signed a noninterest bearing note requiring payment of €30,000 annually for seven years. The first
payment was made on January 1, year 1. The prevailing interest rate for this type of
note at the date of issuance was 10%. Which of the following amounts should Turnip
record as sales revenue in January, year 1.
1)
2)
3)
4)
€160,659
€143,723
€130,658
€146,053
t. On January 1, year 1, Wiley Inc. sold equipment to Hazy Ltd. for consideration of
€50,000 cash plus a three-year, 8%, €120,000 note receivable. Interest payments are
due each December 31. The market rate of interest for loans of similar risk is 8%.
Hazy made the first interest payment as scheduled. On December 31, year 2, Hazy
advised Wiley that it was in some financial difficulty and would not be able to repay
the principal amount of the loan until December 31, year 5, two years later than
originally due. Hazy did pay the current year’s interest and agreed to continue paying
interest each December 31 until the new maturity date, at the original 8% rate. Wiley
believed that Hazy would be able to meet these new repayment terms.
What is the amount of the loan impairment at December 31, year 2?
1)
2)
3)
4)
€9,600
€19,200
€24,744
€0
Question 2 (6 marks)
Desperado Inc. has €450,000 of accounts receivable owing from its customers. It is in
desperate need of cash and has heard that it would be possible to sell its accounts
receivable to a factor in exchange for an immediate cash payment.
Required
1. (3 marks)
Explain to Desperado the difference between factoring receivables with recourse and
without recourse. Would Desperado likely get more cash by factoring its receivables with
recourse or without recourse?
2. (3 marks)
How would the recording of the factoring of the receivables differ if Desperado sold with
recourse versus selling without recourse?
Question 3 (14 marks)
Rutnip Inc. is in the process of preparing its bank reconciliation for the month of
December, 20X5. The following information is available from the various cash records:
November 30, 20X5, Bank Reconciliation
€ 14,000
3,080
(4,000)
€ 13,080
Cash balance per bank
Add: Deposits in transit
Deduct: Outstanding cheques
Cash balance per books
Month of December, 20X5, Results
December deposits
December cheques written
December notes receivable collected
(not included in December deposits)
Per Bank
Per Books
€ 10,000
8,200
€ 11,820
6,400
1,800
0
December bank charges
NSF cheque from customer Smythe
December interest on bank loan
Balance, December 31, 20X5
30
270
470
17,100
0
0
0
18,770
In comparing the records per the bank with the entries in the ledger for December, it was
noted that a deposit recorded by Rutnip for €320 was recorded by the bank as a deposit of
€230. After checking it was determined that Rutnip had made a clerical error on the
deposit slip and that the bank’s record of the deposit was the correct one.
Required
1. (4 marks)
Calculate the amounts of deposits in transit and outstanding cheques at the end of
December, 20X5, for Rutnip Inc.
2. (5 marks)
Prepare a bank reconciliation for Rutnip Inc. as at December 31, 20X5.
3. (5 marks)
Prepare the journal entries Rutnip Inc. would have to make to adjust its cash balance to
the correct amount at December 31, 20X5.
Question 4 (20 marks)
The December 31, 20X5, Balance Sheet of Techno Inc. reported the following:
Accounts receivable
Allowance for doubtful accounts
€ 162,000
€ 3,400
Each account had its normal debit or credit balance. Techno uses the allowance method
for estimating bad debts expense. During 20X6, Techno made sales on account totalling
€240,000 and cash sales of €46,000. Customer payments on account during 20X6 were
€210,000. Accounts receivable written off as worthless during the year totalled €2,400.
Accounts receivable totalling €5,000, which were written off during 20X5, were
subsequently collected in 20X6. The €5,000 is included in the €210,000 of cash
collections from customers.
Required
1. (4 marks)
Prepare the journal entry to record the write off of accounts receivable in 20X6. What
effect does the write off of accounts receivable have on total current assets?
2. (4 marks)
Prepare the journal entry to record the collection of accounts receivable in 20X6 that had
been written off in 20X5.
3. (4 marks)
Calculate the balances in the Accounts receivable and Allowance for doubtful accounts at
the end of 20X6, prior to the recording of bad debt expense for 20X6.
4. Prepare the journal entry to record bad debt expense for 20X6 under each of the
following alternative assumptions of estimating bad debt expense:
a. (2 marks)
Bad debt expense is estimated using the credit sales method with an estimated
uncollectible rate of 2% of credit sales.
b. (2 marks)
Bad debt expense is based on the accounts receivable method and an aging of
accounts receivable at December 31, 20X6, estimates that €5,400 of accounts
receivable will become uncollectible.
5. (4 marks)
For each assumption in part 4, show how Accounts receivable would be reported on the
December 31, 20X6, balance sheet of Techno.
Question 5 (10 marks)
On January 1, 20X5, XTL Inc. sold used computer manufacturing equipment to JL
Computers Inc. for €1,000,000. XTL received as consideration €250,000 of cash and a
non-interest bearing note receivable for the balance. The note receivable is repayable in
three equal annual payments commencing on December 31, 20X5. The net book value of
the equipment was €600,000 at the time of the sale. The market rate of interest for an
instrument of similar risk was 10%.
JL Computers Inc. made its first payment of €250,000 on December 31, 20X5, as
scheduled. However, by December 31, 20X6, it was clear that JL Computers Inc. was in
some serious financial difficulty. Along with other creditors, XTL agreed to restructure
its note receivable with JL. It was agreed that the remaining €500,000 owing would be
paid in full in three years on December 31, 20X9, rather than the originally scheduled
€250,000 at December 31, 20X6, and €250,000 at December 31, 20X7.
Required
1. (4 marks)
Prepare the journal entry at January 1, 20X5, to record XTL’s sale of the equipment.
2. (2 marks)
Prepare the journal entry to record XTL’s receipt of the first payment of €250,000 on
December 31, 20X5.
3. (4 marks)
Prepare the journal for XTL to record the impairment of the note receivable from
JL Computers at December 31, 20X6.
Question 6 (20 marks)
Spruce Inc. engaged in two transactions during 20X5 that gave rise to certain notes
receivable/payable. On January 1, 20X5, Spruce purchased undeveloped land by paying
€80,000 cash and signing a three-year, 4% note payable for €240,000. Interest payments
are due each year on December 31 and the principal is due on December 31, 20X7. On
January 1, 20X5, Spruce sold merchandise on credit to Customer A for €14,000 and
received a two year, non-interest-bearing note receivable, due December 31, 20X6. The
market rate of interest was 8%. Spruce’s fiscal year end is December 31.
Required
1. (12 marks)
Prepare the journal entries to record the purchase of the land and the subsequent
recognition of interest expense and repayment of the note payable.
2. (8 marks)
Prepare the journal entries to record the sale of goods to customer A and the subsequent
recognition of interest revenue and collection of note receivable.
Suggested solutions
Question 1 (30 marks)
Multiple choice (1 mark each)
a. 3)
Although 1 and 2 are important parts of an internal control system for cash, the
segregation of the duties of cash handling from cash accounting is the most important
internal control over cash.
b. 3)
The cash held in the sinking fund is not available for current use. Therefore, it would be
recorded as a non-current asset on the balance sheet. Note that while petty cash normally
has its own G/L account, it would usually be part of cash reported on the balance sheet.
c. 4)
The direct write-off method of accounting for bad debts expense violates the matching
principle because the expense is recorded in the period when the account is written off,
which may not be in the period the related sale was made.
d. 2)
Both assignment of accounts receivable and factoring of accounts receivable mean that
accounts receivable are converted to cash prior to their normal collection time.
e. 1)
When accounts receivable are sold to a factor without recourse it means that the factor is
responsible for any uncollectible accounts.
f. 2)
The cost of the first computer will be €4,000. Since the note payable carries the market
rate of interest, no discounting is required. To get the cost of the second computer, the
cash payments must be discounted at 8%. The only cash payment is the payment of
€4,320 at the end of one year. The present value factor for a single sum to be paid at the
end of one period, discounted at 8% is 0.9259. €4,320  0.9259 = €4,000.
g. 3)
The fact that the maker of the note is experiencing financial difficulty does not
necessarily mean that payment won’t be made as scheduled. When the payee determines
it is probable that the recoverable value of the note is less than its carrying value,
impairment has occurred.
h. 2)
The bank account and the petty cash fund are two separate cash accounts and should be
added together to get the total cash to be reported on the balance sheet.
i. 4)
The bank balance is too low compared to the cash general ledger balance because of
deposits in transit. Therefore, deposits in transit need to be added to the balance per bank.
j. 3)
The bank reconciliation is designed to reconcile both the unadjusted cash balance per the
books and the unadjusted cash balance per the bank to the correct cash balance that
should be reported on the balance sheet.
(2 marks each)
k. 3)
€40,000 + €20,000 – €4,000
Or, you might notice that both reconciling items are adjustments to the bank balance.
That means the general ledger balance for cash is the correct final balance.
l. 2)
€164 + €34 = €198
This means that cash is short by €2. Since there is only €34 of cash left, €166 of cash
must be added to the petty cash box.
m. 2)
€97,850 + €10,000 – €13,000
n. 3)
€1,840 + €36,750 – €36,200
o. 3)
€1,000 – €200
p. 1)
X + €3,800 + €160 – €3,000 = €2,500
X = €2,500 – €3,800 – €160 + €3,000
q. 2)
€800,000 – €62,500
r. 4)
€40,000 – €3,400
s. 1)
€30,000 + (€30,000  4.3553)
4.3553 is the present value factor for a six-period annuity at a discount rate of 10%.
t. 4)
You could calculate the carrying value at December 31, year 2 (€120,000) and compare it
with the recoverable amount. However, since annual interest payments are expected to be
made each year to maturity, and the stated interest rate is equal to the market rate of
interest, it should be obvious that the present value of the future payments is still equal to
€120,000. If you are not sure, calculate it!
Question 2 (6 marks)
Requirement 1 (3 marks)
Factoring without recourse means that when Desperado sells its receivables to the factor,
it is the factor that assumes the risk for any accounts receivable that cannot be collected
in the future. If the factor is unable to collect certain accounts receivable, it has no
recourse to Desperado. Factoring with recourse means that when Desperado sells it
receivables to the factor, it is Desperado who retains some (or all) of the risk of
uncollectible accounts. If the factor is unable to collect a particular receivable, it has the
right to come back to Desperado for payment of that amount. Desperado will likely get
more cash if it sells its accounts receivables on a with recourse basis. Since the risk of
non-payment remains with Desperado under a with recourse agreement, the factor will be
willing to pay more.
Requirement 2 (3 marks)
When receivables are sold without recourse, the transaction is normally recorded as a
sale. The accounts receivable are removed from the books of Desperado and an expense
equal to the difference between the price paid by the factor and the book value of the
receivables is recognized.
When receivables are sold with recourse, the funds received from the factor are normally
recorded as a loan from the factor rather than as sales proceeds. This is because there
really has not been a transfer of risk from the seller to the factor. As the customers make
payments and funds are collected by the factor, the loan is reduced.
Question 3 (14 marks)
Requirement 1 (4 marks)
Deposits in transit, November 30
Plus Deposits made by Rutnip in December
(€11,820 – €90 error correction)
Deposits that could have been received by bank in December
Deposits actually recorded by bank in December
€ 3,080
11,730
14,810
10,000
Deposits in transit at December 31 (deposit recorded
by the company but not yet recorded by the bank)
€ 4,810
€ 4,000
6,400
10,400
8,200
Outstanding cheques, November 30
Plus cheques written by Rutnip in December
Cheques that could have cleared bank in December
Cheques actually cleared by bank in December
Outstanding cheques at December 31 (cheques written
by the company but not yet recorded by the bank)
€ 2,200
Requirement 2 (5 marks)
RUTNIP INC.
Bank Reconciliation
December 31, 20X5
Cash balance per books, December 31, 20X5
Add:
Note receivable collected by bank
Deduct:
NSF cheque
December bank charge
December interest on bank loan
Error correction on deposit (€320 – €230)
Adjusted cash balance per books, December 31
€ 18,770
1,800
€ 270
30
470
90
(860)
€ 19,710
€ 17,100
Cash balance per bank statement, December 31, 20X5
Add:
Deposits in transit (from Requirement 1)
Deduct:
Outstanding cheques (from Requirement 1)
Adjusted cash balance per bank statement, December 31
4,810
(2,200)
€ 19,710
Requirement 3 (5 marks)
Journal entries from bank reconciliation:
a. Cash ................................................................................ 1,800
Notes receivable.........................................................
1,800
To record collection of note receivable made by bank on behalf of Rutnip.
b. Accounts receivable, Smythe...........................................
270
Cash ...........................................................................
270
To re-establish the account receivable from Smythe since their cheque was no good.
c. Bank service charge expense ...........................................
Cash ...........................................................................
To record the monthly bank charge.
30
d. Interest expense ...............................................................
Cash ...........................................................................
To record monthly interest on bank loan.
470
30
470
e. Accounts receivable .........................................................
90
Cash ...........................................................................
90
To correct error on cash deposit originally recorded as €320, which should have been
€230.
Question 4 (20 marks)
Requirement 1 (4 marks)
Allowance for doubtful accounts ........................................... 2,400
Accounts receivable .........................................................
2,400
There is no effect on total current assets as a result of the accounts receivable write off
entry because both accounts receivable and the related contra account are reduced by the
same amount.
Requirement 2 (4 marks)
Accounts receivable ............................................................... 5,000
Allowance for doubtful accounts .....................................
To re-establish the account receivable that was previously written off.
5,000
Note: the collection of this €5,000 is included in the €210,000 of customer payments for
the year.
Requirement 3 (4 marks)
The balance in the accounts receivable account at December 31, 20X6, before the
recording of the 20X6 bad debt expense is €194,600 as derived below:
Bal. January 1
Sales on account
Accounts receivable
162,000 Cash collected
240,000 AR written off
Re-establish AR
previously written off
Bal. December 31
210,000
2,400
5,000
194,600
The balance in the Allowance for doubtful accounts at December 31, 20X6 before the
recording of the 20X6 bad debt expense is €6,000 as derived below:
Allowance for doubtful accounts
AR written off
2,400 Bal. January 1
Reestablish AR
previously
written off
Bal. Dec. 31
3,400
5,000
6,000
Requirement 4 (4 marks)
a. To calculate bad debt expense based on the credit sales method, the expected
uncollectible rate of 2% is applied to the credit sales for the period of €240,000.
2% of €240,000 = €4,800
The journal entry would be
Bad debt expense ............................................................. 4,800
Allowance for doubtful accounts ...............................
4,800
b. To calculate bad debt expense based on the accounts receivable method, the required
allowance at December 31, 20X6 (€5,400) is compared to the balance in the
Allowance for doubtful accounts prior to the adjustment for bad debts (€6,000) and
an entry is made to adjust to the required amount (€5,400 – €6,000 = (€600)). The
journal entry would be
Allowance for doubtful accounts .....................................
Bad debt expense .......................................................
600
600
The reason for the negative bad debt expense is that there must have been an
overestimation of the expense in prior periods.
Requirement 5 (4 marks)
Credit sales method
Current assets
Accounts receivable
Less: Allowance for
doubtful accounts
Accounts receivable method
€ 194,600
€ 194,600
(1) 10,800
€ 183,800
(2) 5,400
€ 189,200
(1) €6,000 + €4,800
(2) €6,000 – €600
Question 5 (10 marks)
Requirement 1 (4 marks)
The present value of the €750,000 non-interest bearing note would be
€250,000  2.48691 = €621,725
1
The present value factor of an annuity for three periods at 10% (Table 2, Appendix A
Lesson 5)
Therefore, the €750,000 face value note would be recorded as
Face value of note
Less: Discount on note receivable
Present value of note receivable
€ 750,000
128,275
€ 621,275
The entry to record the sale of the equipment by XTL on January 1, 20X5 would be
Cash ...................................................................................... 250,000
Note receivable ...................................................................... 750,000
Discount on notes receivable ...........................................
128,725
Equipment ........................................................................
600,000
Gain on sale of equipment ...............................................
271,275
Requirement 2 (2 marks)
The entries to record the interest revenue and the first repayment of the note at
December 31, 20X6 would be as follows:
Discount on notes receivable .................................................
Interest revenue ................................................................
1
(€750,000 – €128,725)  0.10
62,1271
62,127
Cash ...................................................................................... 250,000
Notes receivable...............................................................
250,000
Requirement 3 (4 marks)
At December 31, 20X6, it is necessary to compare the carrying value of the note
receivable to its recoverable amount to determine if there is an impairment that requires a
write-down.
Carrying value of note receivable at
December 31, 20X6
Present value of €500,000 to be received
in three years
Amount of impairment
1
2
€ 433,8521
375,6502
€ 58,202
€500,000 – (€128,275 – €62,127)
€500,000  0.7513 (the present value of a single sum to be received in three years,
discounted at 10%)
Note: there would be no recognition of interest revenue in 20X6 because of the
impairment of the loan. Once a loan becomes impaired, accrual of interest ceases. If
interest had been accrued to December 31, 20X6, it would just make the amount of the
write-off larger, to offset the interest that had been accrued.
The entry to record the impairment of the loan would be
Charge for loan impairment ...................................................
Allowance for loan impairment .......................................
58,202
52,202
Question 6 (20 marks)
Requirement 1 (12 marks)
The present value of the three year, 4%, €240,000 note payable would be
Present value of €240,000 to be received
in three years, discounted at 8% is
Present value of €9,600 annuity for three
years, discounted at 8%
€240,000  0.7938
€ 190,512
€9,600  2.5771
24,740
€ 215,252
The journal entries to record the purchase of the land and the subsequent interest expense
and principal repayment would be as follows:
January 1, 20X5
Land ...................................................................................... 215,252
Discount on notes payable ..................................................... 24,748
Notes payable...................................................................
240,000
To record purchase of land and issuance of note payable.
December 31, 20X5
Interest expense ..................................................................... 17,2201
Discount on notes payable ...............................................
7,6203
Cash .................................................................................
9,6002
To record annual interest payment, interest expense, and amortization of discount on
notes payable.
1
2
3
€215,252  0.08
€240,000  0.04
€17,220 – €9,600
December 31, 20X6
Interest expense ..................................................................... 17,8301
Discount on notes payable ...............................................
8,2303
Cash .................................................................................
9,6002
To record annual interest payment, interest expense, and amortization of discount on
notes payable.
1
2
3
(€215,252 + €7,620)  0.08
€240,000  0.04
€17,830 – €9,600
December 31, 20X7
Interest expense ..................................................................... 18,4881
Discount on notes payable ...............................................
8,8883
Cash .................................................................................
9,6002
To record annual interest payment, interest expense, and amortization of discount on
notes payable.
1
2
3
(€215,252 + €7,620 + €8,230)  0.08
€240,000  0.04
€18,488 – €9,600
Note that, due to rounding, there is still a €10 balance (€24,748 – €7,620 – €8,230 –
€8,888) in the Discount on notes payable account.
To get rid of this balance, we make the following entry:
Interest expense .....................................................................
Discount on notes payable ...............................................
To bring balance in Discount account to zero.
10
10
December 31, 20X7
Notes payable......................................................................... 240,000
Cash .................................................................................
To record repayment of principal amount of note payable.
Requirement 2 (8 marks)
240,000
The present value of the two-year, non-interest bearing €14,000 note receivable would be
Present value of €140,000 to be received in
two years, discounted at 8% is
€14,000  0.8573
€ 12,002
The journal entries to record the sale of the goods, the recognition of interest revenue and
the subsequent collection of the note receivable would be as follows:
January 1, 20X5
Note receivable ......................................................................
Discount on notes receivable ...........................................
Sales ................................................................................
To record sale of goods.
14,000
1,998
12,002
December 31, 20X5
Discount on notes receivable .................................................
9611
Interest revenue ................................................................
961
To record interest revenue and amortization of discount on note receivable.
1
€12,002  0.08
December 31, 20X6
Discount on notes receivable .................................................
1,0371
Cash ....................................................................................... 14,000
Notes receivable...............................................................
14,000
Interest revenue ................................................................
1,037
To record interest revenue and amortization of discount on note receivable and collection
of note receivable.
1
[(€12,002 + €961)  0.08]