Question

RecRoom Equipment Company received an $8,000, six-month, 6 percent note to settle an $8,000 unpaid balance owed by a customer. a. The note is accepted by RecRoom on November 1, causing the company to increase its Notes Receivable and decrease its Accounts Receivable. b.RecRoom adjusts its records for interest its earned to its December 31 year-end. c.RecRoom receives the interest on the note's maturity date. d.RecRoom receives the principal on the note's maturity date.

Answer 1

(a) The required journals are:

Debit Note receivable $8,000

Credit Accounts receivable $8,000

(To record note receivable)

(b) Adjustment for interest its earned to its December 31 year-end:

Debit Interest receivable $80

Credit Interest revenue $80

(To record interest receivable on notes as at 31 Dec)

(c) Receipt of interest on the note at maturity

Debit Cash $240

Credit Interest receivable $240

(Being receipt of interest on note at maturity)

(d) Receipt of principal on the note at maturity

Debit Cash $8,000

Credit Note receivable $8,000

(Being receipt of note principal at maturity)

Step-by-step explanation:

Note is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest revenue on the note is calculated as: Principal x Interest Rate x Time

The total interest revenue is $8,000 x 6%/12 x 6 months = $240.

Monthly interest revenue is therefore $240 / 6 months = $40.

Total interest as at December 31 (Nov 1 - Dec 31): $40 x 2 months = $80.