Question

A $104,400, 60-day, 6% note recorded on November 21 is not paid by the maker at maturity. The journal entry to recognize this event, assuming a 360-day year, is a. debit Cash, $105,444; credit Notes Receivable, $105,444 b. debit Accounts Receivable, $105,444; credit Notes Receivable, $104,400; credit Interest Receivable, $1,044 c. debit Accounts Receivable, $105,444; credit Notes Receivable, $104,400; credit Interest Revenue, $1,044 d. debit Notes Receivable, $105,444; credit Accounts Receivable, $105,444

Answer 1

Solution:

As per the information given in the question we have

Value of the note = $ 104,400   ;    Duration of the note = 60 days ;

Annual Interest on the note = 6 %

The note recorded on November 21, is not paid by the maker at maturity.

Thus the amount of interest revenue that should be recognized on the maturity of the note is

= Value of the Note * Annual Interest on the note * (Duration of the Note / 360 )

= $ 104,400 * 6 % * ( 60 /360 )

= $ 1044

The journal entry for recognizing the event shall be :

Accounts Receivable              ac Dr              $ 105,444

( $ 104,400 + $ 1,044 )

                                                       To Notes Receivable   ac              $ 104,400

                                                       To Interest Revenue ac                    $ 1,044

The solution is Option c. debit Accounts Receivable, $ 105,444 ; Credit Notes Receivable, $ 104,400 ; Credit Interest Revenue, $ 1,044

The other options are incorrect due to the following reasons :

a.The amount due on the note has not been paid on the maturity date. Hence, it is incorrect to recognize a cash receipt of $ 104,400.

b. This entry should have been recorded when the transaction was first recognized and the Interest payment due on the note, would be treated as receivable.

d. This entry is incorrect on two accounts:

Since the amount due has not been paid on the maturity date, the Notes receivable account cannot be debited and closed. Similarly the Accounts receivable account also cannot be credited and closed.

Also, there has to be a bifurcation of the Interest amount due on the note and the Principal value of the note, which has not been done.