Question

Michael Co. accepts a $6,000, 3-month, 12% promissory note in settlement of an account with Tony Co. How should Michael Co. record this transaction?

1) Debit Accounts Receivable, Credit Notes Receivable
2) Debit Notes Receivable, Credit Accounts Receivable
3) Debit Cash, Credit Notes Receivable
4) Debit Notes Receivable, Credit Cash

Answer 1

Michael Co. should debit Notes Receivable and credit Accounts Receivable when recording this transaction.

Step-by-step explanation:

The correct way for Michael Co. to record this transaction is to debit Notes Receivable and credit Accounts Receivable. This is because Michael Co. is accepting a promissory note from Tony Co., which is considered a new receivable. By debiting Notes Receivable, Michael Co. is recording the increase in this new asset, while crediting Accounts Receivable reflects the decrease in the old asset.