Question

On March 1, 20x4, we convert a $10,000 accounts receivable into a 2 year, 8% note receivable. Interest payments are due on March 1,20×5 and March 1, 20×6. Write all journal entries related to this note. Assume a December 31 year end.

Answer 1

To record the conversion of a $10,000 accounts receivable into a 2-year, 8% note receivable, and subsequent interest and note repayments, different journal entries are made on specific dates, including the initial recognition, interest payments, and principal repayment.

Step-by-step explanation:

Journal Entries for Conversion of Accounts Receivable to Note Receivable

When converting a $10,000 accounts receivable to a 2-year, 8% note receivable on March 1, 20x4, the initial journal entry would be:

• Debit Notes Receivable $10,000
• Credit Accounts Receivable $10,000

For the interest payment due on March 1, 20x5, the entry would be:

• Debit Cash $800 (10,000 × 8%)
• Credit Interest Revenue $800

By December 31, 20x4 (year-end), you must recognize accrued interest:

• Debit Interest Receivable $800 (March 1 to December 31 is 10 months, so $10,000 × 8% × 10/12)
• Credit Interest Revenue $800

And for the interest payment due on March 1, 20x6, the entry would be:

• Debit Cash $800
• Credit Interest Revenue $800

At the end of the note term on March 1, 20x6 the journal entry to record the repayment of the principal would be:

• Debit Cash $10,000
• Credit Notes Receivable $10,000