On April 1, 2021, Shoemaker Corporation realizes that one of its main suppliers is having difficulty meeting delivery schedules, which is hurting Shoemaker's business. The supplier explains that it has a temporary lack of funds that is slowing its production cycle. Shoemaker agrees to lend $450,000 to its supplier using a 12-month, 12% note. Required:

a. The loan of $450,000 and acceptance of the note receivable on April 1, 2021.
b. The adjustment for accrued interest on December 31, 2021.
c. Cash collection of the note and interest on April 1, 2022.

Record the above transactions for Shoemaker Corporation.

Answer and Explanation:

The journal entries are given below:

1.  Notes receivable A/c Dr $450,000

          To Cash A/c            $450,000

(To record the notes receivable acceptance)

2. Interest receivable A/c Dr $40,500

      To Interest revenue  $40,500

(to record the interest is collected)

Interest = Principal × rate of interest × number of months ÷ (total number of months in a year)

= $450,000 × 12% × (9 months ÷ 12 months)

= $40,500

The 9 months is calculated from April 1 to December 31

3.  Cash A/c Dr $504,000

             To Notes receivable A/c $450,000

             To  Interest receivable A/c $40,500

             To Interest revenue A/c      $13,500

(To record the cash collected)

Interest revenue = Principal × rate of interest × number of months ÷ (total number of months in a year)

= $450,000 × 12% × (3 months ÷ 12 months)

= $13,500

The 3 months is calculated from December 31 to April 1

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