The following selected transactions were completed by Fasteners Inc. Co., a supplier of buttons and zippers for clothing:

20Y3

Nov.

21 Received from McKenna Outer Wear Co., on account, a $66,000, 60-day, 8% note dated November 21 in settlement of a past due account.

Dec.

31 Recorded an adjusting entry for accrued interest on the note of November 21. 20Y4

Jan.

20 Received payment of note and interest from McKenna Outer Wear Co.

Required:

Journalize the entries to record the transactions.

20Y3

Nov. 21:

Debit Notes receivable $66,000

Credit Accounts receivable $66,000

(To recognize notes receivable iro past due account)

Dec. 31:

Debit Interest revenue $161.33

Credit Interest receivable $161.33

(To record accrued interest on notes receivable)

Jan. 20:

Debit Cash $66,880

Credit Notes receivable $66,000

Credit Interest receivable $880

(To record payment of note and interest on Nov. 21 notes)

Explanation:

Note receivable 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 notes is calculated as: Principal x Interest Rate x Time

In this case, the total interest expense is $66,000 x 8%/12 x 2 months = $880.

Total interest expense to the Company as at December 31 is therefore $880 / 60 days x 11 days = $161.33.