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28 June, 20:58

ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on the sale of an asset to another party. The discount percentage is 7%. The proceeds to ABC, Inc. equal $1,001.19.

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  1. 29 June, 00:25
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    interest receivable 12.50 debit

    interest revenue 12.50 credit

    --adjusting entry for the interest accrued--

    interest expense 11.31 debit

    cash 1,001.19 debit

    note receivable 1,000.00 credit

    interest receivable 12.50 credit

    --to record early discount of the note--

    Explanation:

    We are going to write-off the note and check for the interest expense:

    book value of the note:

    principal + interest accrued

    principal x rate x time = interest

    1,000 x 0.05 x 3 months/12 month a year = 12.50

    we had interest receivable for 12.50

    1,000 + 12.5 = 1,012.5 we receive 1,001.19

    interest expense: 11.31

    We are following this process to avoid compensate balance as is the company earned interest during those three months and then it pay interest to get cash earlier.
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