Question

Majesty Productions accepted a $7,200, 120-day, 6% note from Swartz Studio on March 1. On the date the note matures, Swartz is unable to pay, but Majesty intends to continue collection efforts. What entry should Majesty record on the maturity date for this dishonored note?a. Debit Accounts Receivable $7,200; credit Notes Receivable $7,200.b. Debit Accounts Receivable $7,200; credit Allowance for Doubtful Accounts $7,200.c. Debit Bad Debt Expense $7,344; credit Notes Receivable $7,344.d. Debit Accounts Receivable $7,344; credit Interest Revenue $144; credit Notes Receivable $7,200.e. Debit Accounts Receivable $7,056; debit Interest Revenue $144; credit Notes Receivable $7,200.

Answer 1

D. Debit account receivable $7,344; credit interest revenue $144; credit note receivable $7,200

Step-by-step explanation:

The accounting entries must take cognizance of the interest element which constitute to part of the revenue. To arrive at the interest element, we have:

Interest = $7200 * 0.06 * 120/360

Interest = $144.

The time 120 needs to be prorated on an annual level. Hence, we divide it by the total number of days available in the year.

Therefore, from the above, the total money expected from the client is $7200 + $144 = $7,344.

Hence, we debit this to show our increased level of money receivable. The corresponding entries is therefore to credit the other leg; interest revenue and credit note receivable with $144 and $7,209, respectively.

The entries are thus balanced.