Final answer:
A dishonored note receivable requires a journal entry that includes debiting 'Accounts Receivable' for the face value, possibly debiting 'Interest Receivable' for any accrued interest, and crediting 'Notes Receivable' and 'Interest Revenue' as appropriate.
This entry reflects the non-payment of the note and maintains accurate financial records.
Step-by-step explanation:
When a note receivable is dishonored, the company holding the note must make an accounting entry to reflect that the note will not be paid.
The journal entry to record a dishonored note involves debiting accounts that reflect the loss incurred, such as 'Accounts Receivable' for the face value of the note, and possibly 'Interest Receivable' for any accrued interest, and crediting 'Notes Receivable' to remove the note from the books.
Additionally, if any interest revenue had been recognized, it should be reversed by crediting 'Interest Revenue'.
Here is an example:
- Debit 'Accounts Receivable' for the face value of the note.
- Debit 'Interest Receivable' if there is any accrued interest not yet received.
- Credit 'Notes Receivable' to remove the note from the books.
- Credit 'Interest Revenue' if any interest had been previously recognized.
The company may also charge the maker of the note a fee for the dishonor, which would require additional entries that reflect this charge.
It is important to maintain accurate financial records and reflect such changes to provide an accurate financial position of the company.