Answer:
interest receivable 12.50 debit
interest revenue 12.50 credit
--adjusting entry for the interest accrued--
interest expense 11.31 debit
cash 1,001.19 debit
note receivable 1,000.00 credit
interest receivable 12.50 credit
--to record early discount of the note--
Explanation:
We are going to write-off the note and check for the interest expense:
book value of the note:
principal + interest accrued
principal x rate x time = interest
1,000 x 0.05 x 3 months/12 month a year = 12.50
we had interest receivable for 12.50
1,000 + 12.5 = 1,012.5 we receive 1,001.19
interest expense: 11.31
We are following this process to avoid compensate balance as is the company earned interest during those three months and then it pay interest to get cash earlier.
