Question

Accompanying a bank statement for Borden Company is a credit memo for $21,200 representing the principal ($20,000) and interest ($1,200) on a note that had been collected by the bank. The company has been notified by the bank at the time of the collection but had made no entries.

Answer 1

The journal entry to record this note collection carried out by the bank should be:

Dr Cash 21,200

Cr Notes receivable 20,000

Cr Interest revenue 1,200

Step-by-step explanation:

Notes receivable is an asset account and it probably represented a sale made on credit by the company, so when it was collected, the amount should decrease and that is done by crediting it.

On the other hand, since only $20,000 belonged to the note, the rest ($1,200) must be recorded as interest revenue. Revenues are always credited.