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21 November, 20:30

Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2021. The note was accepted as payment of a delinquent receivable of $2,500. What is the correct entry to record the note?

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  1. 21 November, 21:58
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    The correct entry is:

    Jan 1st, 2021

    Dr Non-interest-bearing note Receivable $2,800

    Cr Account Receivable $2,500

    Cr Unearned Interest Revenue $300

    (to record the acceptance of the non-interest-bearing note)

    Explanation:

    Although the note is non-interest-bearing, the acceptance for $2,800 note due in six-month for the currently due Receivable of $2,500 does imply that Plunder Inc. accept delay of receivable repayment for another 6 months at the interest income required of $300 (2,800 - 2,500).

    This $300 is not earned at the time of note acceptance, instead, it is earned throughout the period of 6 months of the note; thus, it is recorded as unearned interest income.

    That is why we have the journal entries as shown above in the Answer part.
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