Question

on august 31, 2024, paloma totten borrowed $1,000 from lowa state bank. totten signed a note payable, promising to pay the bank principal plus interest on august 31, 2025. the interest rate on the note is 6%. the accounting year of lowa state bank ends on june 30, 2025. journalize lowa state banks (a) lending money on the note receivable at august 31, 2024, (b) accrual of interest at june 30, 2025, and (c) collection of principal and interest at august 31, 2025, the maturity date of the note.
journalize lowa state banks (a) lending money on the note receivable at august 31, 2024, (b) accrual of interest at june 30, 2025, and (c) collection of principal and interest at august 31, 2025, the maturity date of the note. (record debits first, then credits. exclude explanations from any journal entries.)
(a) prepare the journal entry for the issuance of the note receivable on august 31, 2024.
date accounts debit credit
august 31, 2024

Explanation:

Step1: Lending money on the note receivable (August 31, 2024)

When the bank lends money, it creates a note receivable. The bank's asset (Note Receivable) increases (debit), and its asset (Cash) decreases (credit).
Debit: Note Receivable - $1,000
Credit: Cash - $1,000

Step2: Accrual of interest (June 30, 2025)

The time from August 31, 2024, to June 30, 2025, is 10 months. The interest formula is \(I = P\times r\times t\), where \(P=\$1,000\), \(r = 6\%=0.06\), and \(t=\frac{10}{12}\).
\(I=1000\times0.06\times\frac{10}{12}=\$50\)
The bank's asset (Interest Receivable) increases (debit), and its revenue (Interest Revenue) increases (credit).
Debit: Interest Receivable - $50
Credit: Interest Revenue - $50

Step3: Collection of principal and interest (August 31, 2025)

The total interest for 12 months is \(I = 1000\times0.06\times1=\$60\). The interest for the remaining 2 months (\(I_{remaining}=1000\times0.06\times\frac{2}{12}=\$10\))
The bank's asset (Cash) increases by the principal (\(\$1000\)) + total interest (\(\$60\)) = \(\$1060\) (debit). The Note Receivable (\(\$1000\)) is removed (credit), Interest Receivable (\(\$50\)) is removed (credit), and Interest Revenue (\(\$10\)) is recognized (credit).
Debit: Cash - $1,060
Credit: Note Receivable - $1,000
Credit: Interest Receivable - $50
Credit: Interest Revenue - $10

Answer:

(a)

Date	Accounts	Debit	Credit
	Cash		1000

(b)

Date	Accounts	Debit	Credit
	Interest Revenue		50

(c)

Date	Accounts	Debit	Credit
	Note Receivable		1000
	Interest Receivable		50
	Interest Revenue		10