Ask Question
21 October, 08:50

ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on the sale of an asset to another party. The discount percentage is 7%. The proceeds to ABC, Inc. equal $1,001.19.

+2
Answers (1)
  1. 21 October, 08:59
    0
    interest receivable 12.50 debit

    interest revenue 12.50 credit

    --adjusting entry for the interest accrued--

    interest expense 11.31 debit

    cash 1,001.19 debit

    note receivable 1,000.00 credit

    interest receivable 12.50 credit

    --to record early discount of the note--

    Explanation:

    We are going to write-off the note and check for the interest expense:

    book value of the note:

    principal + interest accrued

    principal x rate x time = interest

    1,000 x 0.05 x 3 months/12 month a year = 12.50

    we had interest receivable for 12.50

    1,000 + 12.5 = 1,012.5 we receive 1,001.19

    interest expense: 11.31

    We are following this process to avoid compensate balance as is the company earned interest during those three months and then it pay interest to get cash earlier.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers