Question

On August 2, Jun Co. receives a $8,000, 90-day, 11.0% note from customer Ryan Albany as payment on his $8,000 account receivable. Prepare Jun's journal entry assuming the note is honored by the customer on October 31 of that same year. (Do not round intermediate calculations. Round your answers to nearest whole dollar value. Use 360 days a year.) Record cash received on note plus interest.

Answer 1

To answer the student's question, interest on the promissory note is calculated using the principal, rate, and time, with interest totaling $220. The journal entry debits $8,220 in cash, credits $8,000 to notes receivable, and credits $220 to interest revenue.

Step-by-step explanation:

The question relates to the accounting treatment of a promissory note received by Jun Co. and its subsequent realization on the due date. To calculate the interest earned on the promissory note, we use the formula: Interest = Principal × Rate × Time, where the principal is $8,000, the annual interest rate is 11%, and time is the duration of the note in years (90 days out of 360 days).

First, calculate the interest:

1. Interest = $8,000 × 11% × (90/360) = $8,000 × 0.11 × 0.25 = $220

Next, prepare the journal entry for when the note is honored:

• Cash (Debit) = $8,000 (principal) + $220 (interest) = $8,220
• Notes Receivable (Credit) = $8,000
• Interest Revenue (Credit) = $220

Jun Co. will record the receipt of $8,220 cash, with $8,000 as the note's principal and $220 as the earned interest.

Answer 2

August 2 Notes Receivable 8000 Dr

Accounts Receivable- Ryan 8000 Cr

October 30 Interest receivable 220 Dr

Interest Revenue 220 Cr

October 31 Cash 8220 Dr

Notes Receivable 8000 Cr

Interest Receivable 220 Cr

Step-by-step explanation:

When we receive the Note against the Accounts Receivable, we will credit the Accounts Receivable to close the account of Ryan and create a new current asset account of Notes Receivable on August 2.

On October 30, 90 days period of Note is complete so we will record the interest that is receivable for us on this note.

• Interest Receivable = 8000 * 11% * 90/360 = $220

We record this as Interest Receivable as we have not received this and credit Interest revenue as it is our income.

On 31 October, when we receive cash it will be total of Notes payable and Interest so we will debit cash by 8220 and credit the Notes payable and interest receivable.