Question

On January 15, 2016, Jaymes Company received a two-month, 4%, $7,000 note from Peter Long for the settlement of his open account. The entry by Jaymes Company on March 15, 2016 if Long dishonors the note and collection is expected is:

Answer 1

The question relates to accounting practices for a dishonored note receivable. The correct journal entry would reverse the note receivable and record it as an account receivable with the accrued interest. The interest is calculated for the two-month period of the note's existence.

Step-by-step explanation:

The subject of this question relates to accounting, specifically the handling of a dishonored note receivable in a company's financial records. On January 15, 2016, Jaymes Company received a two-month, 4%, $7,000 note from Peter Long. When a note receivable is dishonored and the company still expects to collect, the company must reverse the entry made when the note was initially recognized and record the amount as an accounts receivable.

The journal entry on March 15, 2016, would be:

• Debit: Notes Receivable $7,000
• Debit: Interest Revenue (($7,000 * 4%) * (60/365))
• Credit: Accounts Receivable (sum of above debits)

The calculation for interest revenue would be: $7,000 * 0.04 * (60/365) = $45.75. So, the Credit to Accounts Receivable would be $7,045.75. This action effectively removes the note from the company's notes receivable account and recognizes instead that the amount is now due again as an ordinary receivable, plus the interest accrued up to the date of dishonor.