Suppose a company accepts a Note Receivable to settle a past due balance in Accounts Receivable....

Suppose a company accepts a Note Receivable to settle a past due balance in Accounts Receivable. How would the company record this transaction? Provide an example and related journal entry.

*explain

Solutions

Expert Solution

When a company received a notes Receivable in settlement of pas due, a new asset is created for notes receivable and pas due which was shown in balance sheet as an asset is eliminated by Crediting accounts receivables and Debiting notes receivable. The net effect on balance sheet is zero because the amount of asset increase is equal to amount of asset decrease. Notes Received are generally accepted with interest because lender is delaying his payments so to compensate interest is also paid at the time of maturity.

The duration of the note can be 3 months, 6 months 1 year etc. It basically depends upon agreement between 2 persons.

Example is given below

Suppose a customer has a balance of $100,000 and he settles with accepting a 3 month’s note at 12% Per Annum Interest for same amount. Journal entry will be as follows.

Date	General Journal	Debit	Credit
Jan 1 2017	Notes receivable	$ 100,000.00
	Accounts receivables		$ 100,000.00
	(Accepted notes receivable from customer)

Mar 31 2017	Cash	$ 103,000.00
	Notes Receivable		$ 100,000.00
	Interest revenue		$ 3,000.00
	(Note redeemed with interest @12% per annum)

ekkarill92 answered 1 year ago

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