P-F:8-34A Accounting for notes receivable, dishonored notes, and accrued interest revenue (Learning Objective 4) Consider the following transactions for CC Publishing. 2024 Dec. 6 Received a $18,000, 90-day, 6% note in settlement of an overdue accounts receivable from Go Go Publishing. Made an adjusting entry to accrue interest on the Go Go Publishing note. Made a closing entry for interest revenue. 31 31 2025 Mar. 6 Jun. 30 Oct. 2 Dec. 1 1 Collected the maturity value of the Go Go Publishing note. Loaned $11,000 cash to Lincoln Music, receiving a six-month, 20% note. Received a $2,400, 60-day, 20% note for a sale to Tusk Music. Ignore Cost of Goods Sold. Tusk Music dishonored its note at maturity. Wrote off the receivable associated with Tusk Music. (Use the allowance method.) Collected the maturity value of the Lincoln Music note. 30 Journalize all transactions for CC Publishing. Round all amounts to the nearest dollar. Dec. 31, 2024 Income Summary CR $74
The Correct Answer and Explanation is:
Here’s the journal entries for CC Publishing related to the transactions from the prompt:
📘 Journal Entries for CC Publishing
2024
Dec. 6
Notes Receivable – Go Go Publishing 18,000
Accounts Receivable – Go Go Publishing 18,000
(To record receipt of a 90-day, 6% note)
Dec. 31
Interest Receivable 90
Interest Revenue 90
(To accrue interest: $18,000 × 6% × 25/360)
Dec. 31
Interest Revenue 90
Income Summary 90
(To close interest revenue to income summary)
2025
Mar. 6
Cash 18,270
Notes Receivable – Go Go Publishing 18,000
Interest Receivable 90
Interest Revenue 180
(To collect note: $18,000 + full interest: 90 already accrued + $18,000 × 6% × 65/360 = 180)
Jun. 30
Notes Receivable – Lincoln Music 11,000
Cash 11,000
(To record loan to Lincoln Music, 6-month, 20% note)
Oct. 2
Notes Receivable – Tusk Music 2,400
Sales Revenue 2,400
(To record sale on a 60-day, 20% note)
Dec. 1
Accounts Receivable – Tusk Music 2,464
Notes Receivable – Tusk Music 2,400
Interest Revenue 64
(To dishonor note: $2,400 + $2,400 × 20% × 60/360)
Dec. 1
Allowance for Doubtful Accounts 2,464
Accounts Receivable – Tusk Music 2,464
(To write off Tusk Music's dishonored note)
Dec. 30
Cash 13,100
Notes Receivable – Lincoln Music 11,000
Interest Revenue 2,100
(To collect note: $11,000 + $11,000 × 20% × 6/12 = 2,100)
💬 Explanation
This exercise demonstrates accounting for notes receivable, including accrual of interest, dishonored notes, and recognition of interest revenue. A note receivable is a formal promise that a customer will pay a specific amount of money on a specified future date, often with interest.
On Dec. 6, CC Publishing exchanged an overdue account for a 90-day, 6% note from Go Go Publishing. This shifted the balance from Accounts Receivable to Notes Receivable, reflecting the new formal agreement.
At year-end (Dec. 31, 2024), interest had accrued for 25 days (Dec 6–31). The interest ($18,000 × 6% × 25/360 = $90) was recorded using an adjusting entry to recognize interest earned but not yet received. It was also closed to Income Summary.
On Mar. 6, 2025, CC collected the maturity value of the note: principal + total interest ($18,000 + $270). Part of the interest was previously accrued, and the rest was recognized now.
Later, CC made a new loan to Lincoln Music for $11,000 on Jun. 30, creating another note receivable. On Oct. 2, a product sale to Tusk Music was converted to a 60-day note.
However, Tusk Music dishonored the note on Dec. 1, requiring the amount (including interest) to be transferred back to Accounts Receivable. Since it was uncollectible, CC wrote it off using the allowance method, decreasing both Accounts Receivable and Allowance for Doubtful Accounts.
Finally, on Dec. 30, CC collected the full maturity value of the Lincoln Music note, including the interest of $2,100, completing the transaction.
This problem illustrates key aspects of notes receivable accounting, including adjusting entries, recognition of interest revenue, dishonored notes, and the write-off process using the allowance method.
