Q19. Notes receivable
On December 1, 20×1, Entity A received a promissory note as the collection of accounts receivable from a customer.
(a) Face amount of the note: $80,000
(b) Due date of the note: May 31, 20×2
(c) Annual interest rate = 12%
What are the journal entries to be prepared on December 1 and 31, 20×1?
A19. The face amount of a promissory note receivable is recorded on the debit side.
(1) December 1, 20×1: to record the receipt of a promissory note
| Debit | Credit | |
| Notes receivable | 80,000 | |
| Accounts receivable | 80,000 |
[Note]
1. Increase in notes receivable (asset): debit
2. Decrease in accounts receivable (asset): credit
(2) December 31, 20×1: to record accrued interest revenue for the month of December 20×1
| Debit | Credit | |
| Interest receivable | 800 | |
| Interest revenue | 800 |
[Note]
1. Increase in interest receivable (asset): debit
2. Increase in interest revenue (revenue): credit
3. Annual interest = $80,000 x 12% = $9,600
4. Monthly interest = annual interest x 1/12 = $9,600 x 1/12 = $800
(3) May 31, 20×2: to record the receipt of the face amount of the note receivable
| Debit | Credit | |
| Cash | 80,000 | |
| Notes receivable | 80,000 |
[Note]
1. Increase in cash (asset): debit
2. Decrease in notes receivable (asset): credit
(4) May 31, 20×2: to record the receipt of interest on the note receivable
| Debit | Credit | |
| Cash | 4,800 | |
| Interest receivable | 800 | |
| Interest revenue | 4,000 |
[Note]
1. Increase in cash (asset): debit
2. Decrease in interest receivable (asset): credit
3. Increase in interest revenue (revenue): credit
4. Interest revenue recognized in 20×2 = monthly interest x 5 months
= $800 x 5 = $4,000
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