Question

Accompanying a bank statement for Borden Company is a credit memo for $12,180 representing the principal ($12,000) and interest ($180) on a note that had been collected by the bank. The company had been notified by the bank at the time of the collection but had made no entries. Journalize the entry that should be made by the company to bring the accounting records up to date.

Answer 1

Answer:

Dr  cash         $12,180

Cr notes receivable        $12,000

cr interest revenue             $180

Explanation:

The cash receipt implies that the company cash has improved by $12,180 which means that a debit of $12,180 would be recorded in the cash account,since an increase in asset is a debit to the specific asset account.

On the other hand,notes receivable account that was previously debited when the transaction was consummated will now be credited with $12,000 with $180 credited to interest revenue account.

The rationale for credit entry in interest revenue is that an increase in income is naturally a credit entry in the books of accounts.