Question

On October 1, Black Company receives a 10% interest-bearing note from Reese Company to settle a $22,200 account receivable. The note is due in six months. At December 31, Black should record interest revenue of

Answer 1

Black Company should record interest revenue of $555 on December 31 for the 10% interest-bearing note from Reese Company, based on the three months of interest accrued on the $22,200 principal.

Step-by-step explanation:

The student's question is about calculating interest revenue on a note receivable. When Black Company receives a 10% interest-bearing note for a $22,200 account receivable from Reese Company, it agrees to receive interest on this amount over the period the note is held. To determine the interest revenue recorded by December 31, we consider only the interest accrued over three months (October, November, and December), since the note's duration is six months but we are calculating interest for the fiscal year end.

To calculate this, we use the formula for simple interest: Interest = Principal x Rate x Time. Here, Principal = $22,200, Rate = 10% or 0.10 (annual rate), and Time = 3/12 year because we're only calculating for three months. Therefore, the interest revenue is:

Interest Revenue = $22,200 x 0.10 x (3/12)
= $22,200 x 0.10 x 0.25
= $555

Black Company should record $555 as interest revenue on December 31.

Answer 2

$555

Step-by-step explanation:

The computation of the interest revenue is shown below:

= Account receivable × rate of interest × number of months ÷ (total number of months in a year)

= $22,200 × 10% × (3 months ÷ 12 months)

= $2,220 × (3 months ÷ 12 months)

= $555

The three month is calculated from October 1 to December 31. The six month period of note is ignored