Question

On Jan 1, Klay Corp receives a $100,000 120 day non interest bearing note receivable from a customer. The discount rate is 6%. On May 1, when Klay receives full payment from the customer, what will Klay record?

1) A decrease in accounts receivable and an increase in cash
2) An increase in accounts receivable and a decrease in cash
3) An increase in accounts receivable and an increase in cash
4) A decrease in accounts receivable and a decrease in cash

Answer 1

On May 1, when Klay Corp receives full payment, they will record a decrease in accounts receivable and an increase in cash, reflecting the collection of the non-interest bearing note that was initially recorded at a discounted value due to the discount rate.

Step-by-step explanation:

On January 1, Klay Corp receives a $100,000 120-day non-interest bearing note receivable from a customer. With a discount rate of 6%, the note's present value is less than its face value of $100,000 at the time the note is received. On May 1, when Klay Corp receives the full payment from the customer, they will record an increase in cash due to the receipt of the note's face value. They will also have to record the elimination of the note receivable that was on the books (initially recorded at its discounted present value).

Therefore, on May 1, Klay Corp will:

1. Decrease the notes receivable account due to the collection of the note.
2. Increase the cash account by the same amount the customer repays the face value of the note.

Consequently, the correct answer is: (1) A decrease in accounts receivable and an increase in cash.