Question

Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2021. The note was accepted as payment of a delinquent receivable of $2,500. What is the correct entry to record the note?

Answer 1

Answer:

The correct entry is:

Jan 1st, 2021

Dr Non-interest-bearing note Receivable   $2,800

Cr Account Receivable                                $2,500

Cr Unearned Interest Revenue                   $300

(to record the acceptance of the non-interest-bearing note)

Explanation:

Although the note is non-interest-bearing, the acceptance for $2,800 note due in six-month for the currently due Receivable of $2,500 does imply that Plunder Inc. accept delay of receivable repayment for another 6 months at the interest income required of $300 ( 2,800 - 2,500).

This $300 is not earned at the time of note acceptance, instead, it is earned throughout the period of 6 months of the note; thus, it is recorded as unearned interest income.

That is why we have the journal entries as shown above in the Answer part.