Question

On June 1, Parson Assoc. sold equipment to Arleo and agreed to accept a 3-month, $55,000, 10% interest-bearing note in payment at a time when the prevailing rate of interest for similar transactions was 10%. When the note was collected upon maturity, Parson would recognize interest revenue of:

Answer 1

Answer:

Parson would recognize an interest revenue of $1375

Explanation:

The quoted interest rate on bond is the annual rate of interest. The bond is for 3 months which means that the interest revenue will be recorded for the 3 months period from June to August and the bond will mature on 31 August.

The interest revenue to be be recorded on this note is,

Interest Revenue = 55000 * 0.1 * 3/12   =  $1375

The entry to record the receipt of interest and face value will be,

Cash                              56375

    Interest revenue               1375

    Bonds Receivable            55000