Question

Heinlein Assoc. accepted a two-year interest-bearing note for $1,000,000 on January 1, 2020. The note was accepted as payment for merchandise with a fair value of $1,000,000. The effective interest rate is 7%. Interest is paid at the end of each year.The cash collection on December 31, 2021, would be recorded as:________.

Answer 1

Answer:

                                   Debit                              Credit

Cash                            1,000,000

Note receivable                                                  1,000,000

Cash                              70,000

Interest receivable                                               70,000

Explanation:

At December 31 2021 it would be the end of maturity of the 2 year note so the note would be have to be paid in full, so Heinlein assoc will receive $1,000,000 in cash for the note. Also because it is the end of the year they will also receive 7% interest which is (0.07*1,000,000)= 70,000

The Heinlein Assoc will debit cash by 1,000,000 and credit the note receivable by the same amount and they will debit 70,000 cash and credit interest receivable by 70,000.