Solved Example: Notes Payable and Notes

Receivable
Problem:
On April 1, 2025, ABC Corp. borrows $50,000 from XYZ Bank by signing a 90-day, 8%
note payable.
On the same day, ABC Corp. accepts a 60-day, 6% note receivable worth $30,000 from
a customer (Delta Ltd.) to settle an account.

Calculate for ABC Corp.:

(a) Maturity value and journal entries for the note payable (issuance, adjusting entry on
Apr 30, maturity).
(b) Maturity value and journal entries for the note receivable (acceptance, adjusting
entry on Apr 30, maturity).

Assume ABC’s accounting period ends April 30. Use a 360-day year.

Solution

(a) Note Payable (ABC Corp. as Borrower)

Key Formulas:

 Interest = Principal × Rate × Time

 Maturity Value = Principal + Interest

Step 1: Issuance on April 1

 ABC receives cash; creates liability.

text
 Copy

Download

Dr. Cash $50,000

Cr. Notes Payable $50,000

Step 2: Adjusting Entry on April 30 (Month-End)

 Accrue 30 days of interest (Apr 1–Apr 30):

Interest = $50,000 × 8% × (30/360) = $333.33

text

Copy

Download

Dr. Interest Expense $333.33

Cr. Interest Payable $333.33

Step 3: Maturity on June 29 (90 days)

 Total Interest (90 days) = $50,000 × 8% × (90/360) = $1,000

 Maturity Value = $50,000 + $1,000 = $51,000
 Journal Entry (pay principal + interest):
text

Copy

Download

Dr. Notes Payable $50,000

Dr. Interest Payable $333.33
Dr. Interest Expense $666.67 (June interest: $1,000 - $333.33)
Cr. Cash $51,000

Summary for Note Payable:

 Date Account Debit Credit

Apr 1 Cash $50,000

Notes Payable $50,000

Apr 30 Interest Expense $333.33

Interest Payable $333.33

Jun 29 Notes Payable $50,000

Interest Payable $333.33

Interest Expense $666.67

Cash $51,000

(b) Note Receivable (ABC Corp. as Lender)

Key Formulas:

 Interest = Principal × Rate × Time

 Maturity Value = Principal + Interest

Step 1: Acceptance on April 1

 ABC settles Delta Ltd.’s account receivable.

text

Copy

Download

Dr. Notes Receivable $30,000

Cr. Accounts Receivable $30,000
 Step 2: Adjusting Entry on April 30 (Month-End)

 Accrue 30 days of interest (Apr 1–Apr 30):

Interest = $30,000 × 6% × (30/360) = $150

text

Copy

Download

Dr. Interest Receivable $150

Cr. Interest Revenue $150

Step 3: Maturity on May 30 (60 days)

 Total Interest (60 days) = $30,000 × 6% × (60/360) = $300

 Maturity Value = $30,000 + $300 = $30,300
 Journal Entry (collect principal + interest):
text

Copy

Download

Dr. Cash $30,300

Cr. Notes Receivable $30,000
Cr. Interest Receivable $150
Cr. Interest Revenue $150 (May interest: $300 - $150)

Summary for Note Receivable:

Date Account Debit Credit

Apr 1 Notes Receivable $30,000

Accounts Receivable $30,000

Apr 30 Interest Receivable $150

 Date Account Debit Credit

Interest Revenue $150

May 30 Cash $30,300

Notes Receivable $30,000

Interest Receivable $150

Interest Revenue $150

Final Answer

(a) Note Payable:

 Maturity Value: $51,000

 Total Interest Expense: $1,000

(b) Note Receivable:

 Maturity Value: $30,300

 Total Interest Revenue: $300

Key Takeaways:

1. Notes Payable: Borrower records interest expense.

2. Notes Receivable: Lender records interest revenue.
3. Adjusting entries are needed at period-end for accrued interest.

Solved Example: FIFO and LIFO Inventory

Valuation
 Problem:
ABC Ltd. has the following inventory transactions for January:

Date Transaction Units Cost per Unit Total Cost

Jan 1 Beginning Inventory 100 $10 $1,000

Jan 10 Purchase 150 $12 $1,800

Jan 15 Sale 200 - -

Jan 20 Purchase 200 $14 $2,800

Jan 25 Sale 150 - -

Calculate:
(a) Cost of Goods Sold (COGS) and Ending Inventory using FIFO.
(b) COGS and Ending Inventory using LIFO.

Solution

(a) FIFO Method (First-In, First-Out)

Principle: Oldest inventory is sold first.

Step 1: Sale on Jan 15 (200 units)

 Sell 100 units from Beginning Inventory (Jan 1):

100 units × $10 = $1,000

 Sell 100 units from Jan 10 Purchase (oldest remaining):

100 units × $12 = $1,200

 COGS for Jan 15 = $1,000 + $1,200 = $2,200

 Remaining Inventory:

o Jan 10 Purchase: 150 - 100 = 50 units @ $12

o Jan 20 Purchase: 200 units @ $14

Step 2: Sale on Jan 25 (150 units)

 Sell 50 units from Jan 10 Purchase:

50 units × $12 = $600

 Sell 100 units from Jan 20 Purchase (next oldest):

100 units × $14 = $1,400

 COGS for Jan 25 = $600 + $1,400 = $2,000

 Remaining Inventory:

o Jan 20 Purchase: 200 - 100 = 100 units @ $14

Step 3: Summarize FIFO

 Total COGS = $2,200 (Jan 15) + $2,000 (Jan 25) = $4,200

 Ending Inventory = 100 units × $14 = $1,400

(b) LIFO Method (Last-In, First-Out)

Principle: Newest inventory is sold first.

Step 1: Sale on Jan 15 (200 units)

 Sell 150 units from Jan 10 Purchase (newest at the time):

150 units × $12 = $1,800

 Sell 50 units from Beginning Inventory (next newest):

50 units × $10 = $500

 COGS for Jan 15 = $1,800 + $500 = $2,300

 Remaining Inventory:

o Beginning Inventory: 100 - 50 = 50 units @ $10

o Jan 20 Purchase: 200 units @ $14
 Step 2: Sale on Jan 25 (150 units)

 Sell 150 units from Jan 20 Purchase (newest):

150 units × $14 = $2,100

 COGS for Jan 25 = $2,100

 Remaining Inventory:

o Beginning Inventory: 50 units @ $10

o Jan 20 Purchase: 200 - 150 = 50 units @ $14

Step 3: Summarize LIFO

 Total COGS = $2,300 (Jan 15) + $2,100 (Jan 25) = $4,400

 Ending Inventory = (50 units × $10) + (50 units × $14) = $500 + $700 = $1,200

Final Answer

Method COGS Ending Inventory

FIFO $4,200 $1,400

LIFO $4,400 $1,200

Solved Example: Depreciation Methods

Problem:
ABC Company purchased equipment on January 1, 2025, for $80,000.

 Estimated residual value: $5,000

 Estimated useful life: 5 years
 Estimated total production: 150,000 units
Actual production by year:
 2025: 40,000 units
 2026: 30,000 units
 2027: 50,000 units
 2028: 20,000 units
 2029: 10,000 units

Calculate annual depreciation for all years using:

(a) Straight-Line (SL)
(b) Units of Production (UOP)
(c) Double-Declining Balance (DDB)

Solution

Key Formula

Depreciable Cost = Cost - Residual Value = $80,000 - $5,000 = $75,000

(a) Straight-Line Method

Formula:
Annual Depreciation = Depreciable Cost / Useful Life = $75,000 / 5 = $15,000/year

Annual Schedule:

Year Depreciation Expense Accumulated Depreciation Book Value (End)

2025 $15,000 $15,000 $65,000

Year Depreciation Expense Accumulated Depreciation Book Value (End)

2026 $15,000 $30,000 $50,000

2027 $15,000 $45,000 $35,000

2028 $15,000 $60,000 $20,000

2029 $15,000 $75,000 $5,000 (residual)

(b) Units of Production Method

Formula:
Depreciation per Unit = Depreciable Cost / Total Units = $75,000 / 150,000
= $0.50/unit

Annual Schedule:

Year Units Depreciation Expense Accumulated Depreciation Book Value (End)

2025 40,000 40,000 × $0.50 = $20,000 $20,000 $60,000

2026 30,000 30,000 × $0.50 = $15,000 $35,000 $45,000

2027 50,000 50,000 × $0.50 = $25,000 $60,000 $20,000

2028 20,000 20,000 × $0.50 = $10,000 $70,000 $10,000

2029 10,000 10,000 × $0.50 = $5,000 $75,000 $5,000

(c) Double-Declining Balance (DDB) Method

Formula:
 DDB Rate = (1 / Useful Life) × 2 = (1/5) × 2 = 40%
 Book Value is used (residual value ignored until final year).

Annual Schedule:

Book Value Accumulated Book Value

Year Depreciation Expense
(Start) Depreciation (End)

$80,000 × 40%
2025 $80,000 $32,000 $48,000
= $32,000

$48,000 × 40%
2026 $48,000 $51,200 $28,800
= $19,200

$28,800 × 40%
2027 $28,800 $62,720 $17,280
= $11,520

$17,280 × 40%
2028 $17,280 $69,632 $10,368
= $6,912

$5,368 (adjust to
2029 $10,368 $75,000 $5,000
residual)

2029 Calculation:

 Maximum depreciation = Book Value – Residual Value = $10,368 – $5,000 = $5,368

 DDB would be $10,368 × 40% = $4,147, but this would drop below residual value.
 Adjustment: Depreciation limited to $5,368 to reach residual value.

Final Summary

Year Straight-Line Units of Production Double-Declining Balance

2025 $15,000 $20,000 $32,000

2026 $15,000 $15,000 $19,200

2027 $15,000 $25,000 $11,520

 Year Straight-Line Units of Production Double-Declining Balance

2028 $15,000 $10,000 $6,912

2029 $15,000 $5,000 $5,368

Total $75,000 $75,000 $75,000

Key Rules:

1. Straight-Line: Equal annual expense.

2. Units of Production: Expense varies with usage.
3. DDB: Accelerated depreciation; never reduce book value below residual. Adjust final
year.

Solved Example: General Journal, T-

Accounts, Unadjusted Trial Balance,
Adjusting Entries, and Adjusted Trial Balance
Problem:
ABC Company had the following transactions in December 2025:

1. Dec 1: Invested $50,000 cash to start business.

2. Dec 1: Paid $12,000 for 12 months of rent (Dec 2025–Nov 2026).
3. Dec 2: Purchased $5,000 office supplies on account.
4. Dec 5: Earned $8,000 service revenue (received cash).
5. Dec 10: Purchased equipment for $30,000 cash.
6. Dec 15: Provided $6,000 services on account.
7. Dec 20: Paid $3,000 salaries.
8. Dec 22: Collected $4,000 from Dec 15 account receivable.
9. Dec 31: Declared $1,000 dividends (to be paid in January).
Adjustments at Dec 31:
a) 1 month of rent expired.
b) Office supplies on hand: $2,000.
c) Depreciation: Equipment has 5-year life, $0 residual value.
d) Salaries earned but unpaid: $800.
e) Unearned revenue: $1,500 (received in advance for January services).

Solution

Step 1: General Journal (Record Transactions)

Date Account Debit Credit

Dec 1 Cash 50,000

Owner's Capital 50,000

Dec 1 Prepaid Rent 12,000

Cash 12,000

Dec 2 Office Supplies 5,000

Accounts Payable 5,000

Dec 5 Cash 8,000

Service Revenue 8,000

Dec 10 Equipment 30,000

Cash 30,000

Dec 15 Accounts Receivable 6,000

Service Revenue 6,000

Date Account Debit Credit

Dec 20 Salaries Expense 3,000

Cash 3,000

Dec 22 Cash 4,000

Accounts Receivable 4,000

Dec 31 Dividends Declared 1,000

Dividends Payable 1,000

Step 2: T-Accounts (Post Journal Entries)

Cash (101)

Debit Credit

Dec 1: 50,000 Dec 1: 12,000

Dec 5: 8,000 Dec 10: 30,000

Dec 22: 4,000 Dec 20: 3,000

Bal: 17,000

Accounts Receivable (102)

Debit Credit

Dec 15: 6,000 Dec 22: 4,000

Bal: 2,000

Prepaid Rent (103)

Debit Credit

Dec 1: 12,000

Bal: 12,000

Office Supplies (104)

Debit Credit

Dec 2: 5,000

Bal: 5,000

Equipment (105)

Debit Credit

Dec 10: 30,000

Bal: 30,000

Accounts Payable (201)

Debit Credit

Dec 2: 5,000

Bal: 5,000

Dividends Payable (202)

Debit Credit

Dec 31: 1,000

Bal: 1,000

Owner’s Capital (301)

Debit Credit

Dec 1: 50,000

Bal: 50,000

Service Revenue (401)

Debit Credit

Dec 5: 8,000

Dec 15: 6,000

Bal: 14,000

Salaries Expense (501)

Debit Credit

Dec 20: 3,000

Bal: 3,000

Dividends Declared (302)

Debit Credit

Dec 31: 1,000

Bal: 1,000

Step 3: Unadjusted Trial Balance (Dec 31, 2025)

Account Debit Credit

Cash 17,000
Account Debit Credit

Accounts Receivable 2,000

Prepaid Rent 12,000

Office Supplies 5,000

Equipment 30,000

Accounts Payable 5,000

Dividends Payable 1,000

Owner’s Capital 50,000

Service Revenue 14,000

Salaries Expense 3,000

Dividends Declared 1,000

Total 70,000 70,000

Step 4: Adjusting Entries

Date Account Debit Credit Explanation

Dec 31 Rent Expense 1,000 1 month rent expired ($12,000/12)

Prepaid Rent 1,000

Dec 31 Supplies Expense 3,000 Supplies used ($5,000 - $2,000)

Office Supplies 3,000

Dec 31 Depreciation Expense 500 ($30,000/5 years) × 1/12

Acc. Depreciation-Equip 500

Date Account Debit Credit Explanation

Dec 31 Salaries Expense 800 Salaries owed but unpaid

Salaries Payable 800

Dec 31 Unearned Revenue 1,500 Advance payment for Jan services

Service Revenue 1,500

Step 5: Adjusted Trial Balance (Dec 31, 2025)

Account Debit Credit

Cash 17,000

Accounts Receivable 2,000

Prepaid Rent 11,000 ($12,000 - $1,000)

Office Supplies 2,000 ($5,000 - $3,000)

Equipment 30,000

Acc. Depreciation-Equip 500

Accounts Payable 5,000

Salaries Payable 800

Unearned Revenue 1,500

Dividends Payable 1,000

Owner’s Capital 50,000

Service Revenue 12,500 ($14,000 - $1,500)

Rent Expense 1,000

 Account Debit Credit

Supplies Expense 3,000

Depreciation Expense 500

Salaries Expense 3,800 ($3,000 + $800)

Dividends Declared 1,000

Total 71,300 71,300

Key Takeaways:

1. General Journal: Records transactions chronologically.

2. T-Accounts: Visualize debit/credit activity for each account.
3. Unadjusted Trial Balance: Lists account balances before adjustments.
4. Adjusting Entries:

o Accruals (revenues/expenses earned/incurred but unrecorded).

o Deferrals (prepaid expenses/unearned revenues).
o Estimates (depreciation).
5. Adjusted Trial Balance: Verifies debits = credits after adjustments; basis for financial
statements.

Solved Example: Income Statement and

Balance Sheet
Problem:
Using the Adjusted Trial Balance from the previous example, prepare:
1. Income Statement for ABC Company (December 2025).
2. Balance Sheet as of December 31, 2025.

Adjusted Trial Balance (Recap):

Account Debit Credit

Cash 17,000

Accounts Receivable 2,000

Prepaid Rent 11,000

Office Supplies 2,000

Equipment 30,000

Acc. Depreciation-Equip 500

Accounts Payable 5,000

Salaries Payable 800

Unearned Revenue 1,500

Dividends Payable 1,000

Owner’s Capital 50,000

Service Revenue 12,500

Rent Expense 1,000

Supplies Expense 3,000

Depreciation Expense 500

Salaries Expense 3,800

Dividends Declared 1,000

Total 71,300 71,300

Solution

Step 1: Income Statement (Profit & Loss Statement)

Covers: Revenues and Expenses for a period (here, December 2025).

Formula:
Net Income=Total Revenues−Total ExpensesNet Income=Total Revenues−Tota
l Expenses

ABC Company
Income Statement
For the Month Ended December 31, 2025

Revenues

Service Revenue $12,500

Expenses

Rent Expense $1,000

Supplies Expense $3,000

Depreciation Expense $500

Salaries Expense $3,800

Total Expenses $8,300

Net Income $4,200

Step 2: Statement of Retained Earnings

Connects Income Statement to Balance Sheet.
Formula:
Ending Retained Earnings=Beginning Retained Earnings+Net Income−Dividen
dsEnding Retained Earnings=Beginning Retained Earnings+Net Income−Divide
nds

ABC Company
Statement of Retained Earnings
For the Month Ended December 31, 2025

| Beginning Retained Earnings | $0 |

| Net Income | $4,200 |
| Less: Dividends Declared | ($1,000) |
| Ending Retained Earnings| $3,200 |

Note: Since this is the first month, Beginning Retained Earnings = $0.

Step 3: Balance Sheet (Statement of Financial Position)

Covers: Assets, Liabilities, and Equity at a point in time (December 31, 2025).

ABC Company
Balance Sheet
December 31, 2025

Assets

Current Assets:

Cash $17,000

Accounts Receivable $2,000

Assets

Prepaid Rent $11,000

Office Supplies $2,000

Total Current Assets $32,000

Property, Plant, Equipment:

Equipment $30,000

Less: Accum. Depreciation ($500)

Net Equipment $29,500

Total Assets $61,500

Liabilities

Current Liabilities:

Accounts Payable $5,000

Salaries Payable $800

Unearned Revenue $1,500

Dividends Payable $1,000

Total Liabilities $8,300

Equity

Owner’s Capital $50,000

Retained Earnings $3,200

Total Equity $53,200

Total Liabilities & Equity $61,500

 Key Relationships:

1. Net Income (Income Statement) → Flows to Retained Earnings (Balance Sheet).

2. Assets = Liabilities + Equity

o $61,500 = $8,300 + $53,200 ✓

3. Retained Earnings Calculation:

o Beginning RE ($0) + Net Income ($4,200) - Dividends ($1,000) = $3,200.

Final Notes:

 Dividends Declared is not an expense! It reduces equity (Balance Sheet).

 Unearned Revenue is a liability (services not yet provided).
 Accumulated Depreciation is a contra-asset (reduces equipment value).

💡 Exam Tip: Always verify that Assets = Liabilities + Equity after preparing the Balance
Sheet!