University - Year 2

Accounting

EXERCISE 9

Mythical Company provided the following transactions:

APR 5 Received from A, a customer, P500,000, 60-day, 12% note, dated April
4, in 'payment of an account.
Apr-05 Notes receivable 500,000
Accounts receivable 500,000
APR 15 The note of A was discounted with the bank at 14%.
Apr-19 Cash 501,075
Loss on note discounting 1,425
Notes receivable discounted 500,000
Interest income 2,500
Principal 500,000
Add: Interest (500,000 x 12% x 60/360) 10,000
Maturity value 510,000
Less: Discount (510,000 x 14% x 45,360) -8925
Net proceeds 501,075

Principal 500,000
Accrued interest receivable (500,000 x 12% x 15/360) 2,500
Carrying amount of N/R 502,500

Net proceeds 501,075

Loss: Carrying amount of N/R -502,500
Loss on discounting -1,425
MAY 3 Received a P1,000,000, 30-day noninterest bearing note dated May 1
from B, in payment of an account.
30-day Non-Interest Bearing Note
May-03 Notes receivable 1,000,000
Accounts receivable 1,000,000
MAY 16 The note of B was discounted with the bank at 12%.
May-
16 Cash 995,000

Loss on discounting 5,000

1,000,00
Notes receivable discounted 0
Principal 1,000,000
Less: Discount (1,000,000 x 12% x 15/360) - 5,000
Net proceeds 995,000
MAY 25 Received from C, a customer, a P1,500,000, 60-day 12% note dated May
15 and made by Company X. Gave the customer credit for the maturity
value of the note less discount at 12%.
60-day Interest Bearing Note
May-25 Notes receivable 1,500,000
Interest income 4,500
Accounts receivable 1,504,500
Principal 1,500,000
 Add: Interest (1,500,000 x 12% x 60/360) 30,000
Maturity value 1,530,000
Less: Discount (1,530,000 x 12% x 50/360) - 25,500
Net credit 1,504,500
JUN 7 Received notice from the bank that the note of A Was not paid on maturity.

Paid bank the amount due plus protest fee and other charges of P20,000.
*dishonored
Jun-07 Accounts receivable (510,000 + 20,000) 530,000 note
Cash 530,000
Notes receivable discounted 500,000
Notes receivable 500,000
JUN 15 Received a 60-day, 12% note, P800,000, dated June 15, from D, a customer
for sale of merchandise.
Jun-15 Notes receivable 800,000
Sales 800,000
JUN 18 Received full payment from A including interest of 12% on total amount
due from maturity date of original note.
Jun-18 Cash 532,650
Accounts receivable 530,000
Interest income (530,000 x 12% x 15/360) 2,650
Required: Prepare journal entries to record the transactions assuming any discounting
of note receivable is accounted for as conditional sale with recognition of a
contingent liability.
Adjusting Entries
1.) Accrued interest receivable 4,000
Interest income (800,000 x 12% x 15/360) 4,000
(Accrued interest on D's note)
2.) Notes receivable discounted 1,000,000
Notes receivable 1,000,000
(To cancel the contingent liability on B's note. This note matured on
May 31. Since there is no notice of dishonor, it is assumed that the
said note is paid on the date of maturity.)
Required: Prepare the necessary adjustments on June 30.