RecRoom Equipment Company received an $8,000, six-month, 6 percent note to settle an $8,000 unpaid balance owed by a customer.

a.

The note is accepted by RecRoom on November 1, causing the company to increase its Notes Receivable and decrease its Accounts Receivable.

b. RecRoom adjusts its records for interest its earned to its December 31 year-end.

c. RecRoom receives the interest on the note's maturity date.

d. RecRoom receives the principal on the note's maturity date.

Question 1

Make journal entries:

a) Record the receipt of a note on November 1 for $8,000 to settle an outstanding accounts receivable balance of a customer.

b) Record the interest accrued on the note as of December 31.

c) Record the receipt of the interest on the note's maturity date.

d) Record the receipt of the payment for the full principal.

The journal entries are shown below:

a. Notes receivable A/c Dr $8,000

To Accounts receivable $8,000

(Being receipt of note is recorded)

b. Interest receivable A/c Dr $80

To Interest revenue A/c $80

(Being accrued interest is recorded)

The computation of accrued interest is shown below:

= Principal * rate of interest * number of months : (total number of months in a year)

= $8,000 * 6% * (2 months : 12 months)

= $80

The 2 months is calculated from November 30 to December 31

c. Cash A/c Dr $240

To Interest receivable $80

To Interest revenue $160

(Being cash received in respect of interest accrual is recorded)

The computation of accrued interest is shown below:

= Principal * rate of interest * number of months : (total number of months in a year)

= $8,000 * 6% * (4 months : 12 months)

= $160

The 4 months is calculated from November 30 to April 30

d. Cash A/c Dr $10,200

To Notes receivable A/c $10,200

(Being the receipt of the payment is recorded)