Question

Entity G lent a customer $15,000 on a one-year note, at 7% interest, with interest and principal due at maturity. The customer dishonored the note but Entity G expects eventual collection of all amounts due and owing. Entity G should:

A) write-off the face value of the note.
B) transfer the amount due (principal and interest) to accounts receivable.
C) transfer only the principal amount to accounts receivable.
D) do nothing.

Answer 1

Option C is the Correct answer.

C) Transfer only the principal amount to accounts receivable.

Step-by-step explanation:

Entity G should transfer only the principal amount to accounts receivable. In this scenario, since the customer dishonored the note, it implies that the interest part may not be collected immediately.

However, Entity G expects eventual collection of all amounts due and owing, indicating a likelihood of recovering the principal amount. Writing off the face value of the note (Option A) would be premature as there's an expectation of eventual collection.

Transferring the entire amount due, including interest, to accounts receivable (Option B) might overstate the receivables, as the interest may not be realized immediately.

Doing nothing (Option D) would not accurately reflect the financial position, given the dishonored note. Therefore, the most appropriate action is to transfer only the principal amount to accounts receivable (Option C), reflecting the amount expected to be recovered based on the customer's dishonored note.

This choice aligns with prudent accounting practices, recognizing the uncertain realization of interest while still accounting for the principal amount owed.