On August 1, 2011, Hampton Construction received a 9 percent, six-month note receivable from

Dusty Roads, one of Hampton Construction’s problem credit customers. Roads had owed $36,000 on an outstanding account receivable. The note receivable was taken in settlement of this amount. Assume that Hampton Construction makes adjusting entries for accrued interest revenue once each year on December 31.

a. Journalize the following four events on the books of Hampton Construction.

1. Record the receipt of the note on August 1 in settlement of the account receivable.

2. Record accrued interest at December 31, 2011.

3. Assume that Dusty Roads pays the note plus accrued interest in full. Record the collection of the principal and interest on January 31, 2012.

4. Assume that Dusty Roads did not make the necessary principal and interest payment on

January 31, 2012. Rather, assume that he defaulted on his obligation. Record the default on January 31, 2012.

b. Indicate the effects of each of the four transactions journalized in part a on the elements of the financial statement shown below. Use the code letters I for increase, D for decrease, and NEfor noeffect.

Transcribed Image Text:

Transaction Revenue-Expenses = Net Income Assets = Liabilities Equity