Question

Teller, a calendar year company, purchased merchandise from TechCom on November 1 of the current year. TechCom accepted Teller's $4,800, 90-day, 10% note as payment. What entry should TechCom make on February 1 of the next year when the note is paid, assuming an adjusting entry for interest was made for interest on December 31?

Answer 1

Answer:

Dr Interest Receivable $240

Cr       Interest Income             $240

Explanation:

The reason is that the Techcom company is lender and must account the lending as a loan.

The loan will be paid with the interest at the end of the period. The interest received at the end of December 31 would be the single month loan at the $4800 at the interest rate which is 10 percent here.

The Interest Income = $4800 * (10% interest rate * 2/12) = $240

The interes would be recorded for the two months which is $240 and accounted for as under:

Dr Interest Receivable $240

Cr       Interest Income             $240

And at the end of January 31, Teller will make the payment which would be accounted for as under:

Dr Cash $5260

Cr Interest Revenue  $120

Cr Notes Receivable $4800

Cr Interest Receivable $240