Question

On August 2, Jun Co. receives a $7,500, 90-day, 14.0% note from customer Ryan Albany as payment on his $7,500 account receivable.

Prepare Jun's journal entry assuming the note is honored by the customer on October 31 of that same year.

Answer 1

Journal Entries in the books of Jun Co.

1) August 2

Notes Receivable A/C.................. Dr $ 7,500

To Accounts Receivable (Ryan Albany) $ 7,500

(Entry for receiving Promissory note as payment of Accounts Receivable)

2) October 31

Jun Co receives a 90 days Note for $ 7,500 with an interest rate of 14%.

The due date of the note will be on October 31 (ie. The day on which Jun Co receives the Note is Aug 2, this day is not counted for calculating due date)

Balance days in August - 29 ( ie. 31 - 2)

Number of days in September - 30

Number of days in October - 31

Total days - 90

Calculation of Interest

Note Amount X Interest rate X Number of days/360

ie. $ 7,500 X 14/100 X 90/360 = 262.50

Note:-

a) For Calculating interest, Number of days in a year is taken as 360 days

b) Since the bill is honored in the same year, the entire interest is recognized in the same year.

Journal Entry for honoring the bill

Cash A/C.............................. Dr $ 7,762.50

To Note Receivable $ 7500

To Interest Revenue $ 262.50

(Cash collected including interest, notes receivable is eliminated from books and interest revenue booked)