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Jan 21 A customer who owed $10,000 on an account receivable, agreed to sign a 60-day...

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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 of6.0%. The interest earned on the note will be paid at the maturitydate 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 tothe bank, which discounted the note at 8.0%.

Required:

What is the correct journal entry for February 10th andwhy?

Answer & Explanation Solved by verified expert
3.7 Ratings (274 Votes)

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

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