Question

On February 1, Light Co. received a $20,000, 120 day, 9% note from Dark Co.

The entry made by Light Co. when the note is collected is:

a) Cash 20,000, Notes Receivable 20,000.
b) Accounts Receivable 20,600, Notes Receivable 20,000, Interest Revenue 600.
c) Cash 20,600, Notes Receivable 20,000, Interest Revenue 600.
d) Accounts Receivable 20,600, Notes Revenue 20,000, Interest Revenue 600.

Answer 1

The answer is C.

Step-by-step explanation:

The year is 360 days.

Annual rate is 9%

Therefore, interest rare for the 120-day is 3%[(120/360) x 9%]

So, the interest on the rate is:

3% x $20,000

$600.

The total amount collected from Dark Co. will be principal + interest

$20,000 + $600 = $20,600

According to the accounting rule, debit increases asset and expenses and vice-versa while credit decreases liability, equity, income and vice versa.

So we have:

Dr Cash $20,600

Cr: Receivable $20,000

Cr: Interest Revenue $600.