Answer:
In the books of Blue Company:
November 1, 2017:
Debit Cash $60,000
Credit Note payable $60,000
<em>(To record borrowed note from Yellow Bank)</em>
December 31, 2017:
Debit Interest expense $500
Credit Interest payable $500
<em>(Interest expense recognition on note for 2 months)</em>
August 1, 2018:
Debit Note payable $60,000
Debit Interest payable $2,250
Credit Cash $62,250
<em>(To record settlement of note at maturity)</em>
In the books of Yellow Bank:
November 1, 2017:
Debit Note receivable $60,000
Credit Cash $60,000
<em>(To record note receivable from Blue Company)</em>
December 31, 2017:
Debit Interest receivable $500
Credit Interest revenue $500
<em>(Interest revenue recognition on note for 2 months)</em>
August 1, 2018:
Debit Cash $62,250
Credit Note receivable $60,000
Credit Interest receivable $2,250
<em>(To record note collection at maturity)</em>
Explanation:
Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.
Interest expense / revenue on the notes is calculated as: Principal x Interest Rate x Time
In this case, the total interest expense / revenue is $60,000 x 5%/12 x 9 months = $2,250.
Monthly interest expense / revenue is therefore $2,250 / 9 months = $250.
Therefore, interest expense / revenue recognition for 2 months will be $250 x 2 months (November 1 - December 31) = $500.
