Q19. Notes receivable
On December 1, 20×1, Entity A received a promissory note as the collection of accounts receivable from a customer.
(a) Face amount of the note: $80,000
(b) Due date of the note: May 31, 20×2
(c) Annual interest rate = 12%
What are the journal entries to be prepared on December 1 and 31, 20×1?

A19. The face amount of a promissory note receivable is recorded on the debit side.

(1) December 1, 20×1: to record the receipt of a promissory note

  Debit Credit
Notes receivable 80,000  
     Accounts receivable   80,000

[Note]
1. Increase in notes receivable (asset): debit
2. Decrease in accounts receivable (asset): credit

(2) December 31, 20×1: to record accrued interest revenue for the month of December 20×1

  Debit Credit
Interest receivable 800  
     Interest revenue   800

[Note]
1. Increase in interest receivable (asset): debit
2. Increase in interest revenue (revenue): credit
3. Annual interest = $80,000 x 12% = $9,600
4. Monthly interest = annual interest x 1/12 = $9,600 x 1/12 = $800

(3) May 31, 20×2: to record the receipt of the face amount of the note receivable

  Debit Credit
Cash 80,000  
     Notes receivable   80,000

[Note]
1. Increase in cash (asset): debit
2. Decrease in notes receivable (asset): credit

(4) May 31, 20×2: to record the receipt of interest on the note receivable

  Debit Credit
Cash 4,800  
     Interest receivable   800
     Interest revenue   4,000

[Note]
1. Increase in cash (asset): debit
2. Decrease in interest receivable (asset): credit
3. Increase in interest revenue (revenue): credit
4. Interest revenue recognized in 20×2 = monthly interest x 5 months
= $800 x 5 = $4,000

 

 

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