Question

The journal entry for the collection of the notes is A. Debit Cash 4,000; Credit Accounts Receivable 4,000 B. Debit Cash 3,018; Credit Notes Receivable 3,000, Credit Interest Revenue 18 C. Debit Note Receivable 3,000; Credit Cash 3,000 D. Debit Note Receivable 3,018; Credit Cash 3,018

Answer 1

Answer:

The correct answer is B. Debit Cash 3,018; Credit Notes Receivable 3,000, Credit Interest Revenue 18

Explanation:

The question is incomplete as it only stated the requirement of the question. However, option B above is the closest answer because the company applies the accrual method of accounting, that was why a note receivable was established. The appropriate journals are:

Debit Cash                                        $3,018

Credit Note receivable                   $3,000

Credit Interest receivable                     $18

(Recognition of payment of note receivable with interest)

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 revenue on the notes is calculated as: Principal x Interest Rate x Time

You can use the formula above to arrive at the interest revenue as: $3,000 x Interest rate%/12 x No of months = $18.

Note that the company can accrue for the interest revenue on a monthly basis and not necessarily wait till collection period before recognizing it. Monthly interest revenue recognition would be:

Debit Interest receivable                    $XXX

Credit Interest revenue                      $XXX

(Monthly interest revenue recognition on note)