In: Accounting
Jan 21 A customer who owed $10,000 on an account receivable, agreed to sign a 60-day note receivable with an interest rate of 6.0%. The interest earned on the note will be paid at the maturity date of the note receivable.
Jan. 21 |
Notes Receivable……………........... Accounts Receivable ....……… |
$10,000 |
$10,000 |
Feb 10 Sanford Company sold the note receivable from Jan 21st to the bank, which discounted the note at 8.0%.
Required:
What is the correct journal entry for February 10th and why?
Due date for note receivable is March 22 = Jan 21 + 60 days
Number of days to be considered while calculating discount = Feb 10 to March 22 = 40 days = 1.33 months
Discount calculated by bank for the period left to lapse till due date = 0.08*10100*1.33/12 = $90
Workings for the journal entry are as under:-
Item | Amount in $ | Calculation detail |
Face value | 10000 | |
Interest | 100 | 10000*6%*2/12 |
maturity value | 10100 | Face value + Interest |
Discount calculated | 90 | 0.08*10100*1.33/12 |
Proceeds from note | 10010 | Maturity value less discount |
Net interest income | 10 | Proceeds from note minus face value |
Journal entry to be done on Feb 10:-
Item | Debit | Credit |
Cash A/c | 10010 | |
Notes receivable | 10000 | |
Interest income | 10 |