An advertising company (CNA) recently hired a new marketing director, John Doe,

Question

An advertising company (CNA) recently hired a new marketing director, John Doe, for its new office in Los Angeles. To convince John to move from Pittsburgh, CNA agreed to advance him $100,000 on May 30, 2009, on a one-year, 10.8 percent note, with interest payments required on October 31, 2009, and May 30, 2010. CNA issues quarterly financial statements on March 31, June 30, September 30, and December 31.

1)
Prepare the journal entry that CNA will make to record the promissory note created on May 30, 2009.

2)
Prepare the journal entries that CNA will make to record the interest accruals at each quarter end and interest payments at each payment date. (TIP: Interest receivable will be accrued at the end of each quarter, and then will be reduced when the interest payment is received.)

3)
Prepare the journal entry that CNA will make to record the principal payment at the maturity date.

Explanation / Answer

1) DR: Notes Receivable 100,000 CR: Cash 100,000 2) June 30, 2009 entry DR: Interest Receivable 900 CR: Interest Revenue 900 September 30, 2009 entry DR: Interest Receivable 2,700 CR: Interest Revenue 2,700 October 31, 2009 entry DR: Cash 4,500 CR: Interest Receivable 3,600 CR: Interest Revenue 900 December 30, 2009 DR: Interest Receivable 1,800 CR: Interest Revenue 1,800 March 31, 2010 DR: Interest Receivable 2,700 CR: Interest Revenue 2,700 3) May 31, 2010 DR: Cash 106,300 CR: Notes Receivable 100,000 CR: Interest Receivable 4,500 CR: Interest Revenue 1,800

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