Question

On August 1, Kim Company accepted a 90-day note receivable as payment for services provided to Hsu Company. The terms of the note were $10,500 face value and 4% interest. On October 30, the journal entry to record the collection of the note should include:

A) Interest revenue for $305.
B) Credit to interest revenue for $105.
C) Interest receivable for $5.
D) Notes receivable for $205.

Answer 1

The collection of the note by Kim Company would include a credit to interest revenue for approximately $103.29, which none of the given options correctly state, hence the correct amount does not match any of the options provided in the student's question.

Step-by-step explanation:

When Kim Company accepted a 90-day note receivable on August 1 from Hsu Company, with a face value of $10,500 and an annual interest rate of 4%, the total interest earned by October 30 can be calculated as follows:

First, determine the number of days the note has been held: August 1 to October 30 is 90 days. Then use the formula for simple interest: Interest = Principal × Rate × Time.

Principal = $10,500
Rate = 4% per annum (4/100 = 0.04)
Time = 90/365 (as 90 days out of 365 in a year)

Now compute the interest:
Interest = $10,500 × 0.04 × (90/365) = $103.29 (approximated)

Therefore, the correct journal entry to record the collection of the note should include a credit to interest revenue for the amount of interest earned during that period, which is approximately $103.29. None of the provided options (A $305, B $105, C $5, D $205) correctly state the interest earned. The closest option is B, but since the exact interest amount is $103.29, B is not accurate either.