On August 2, 2013, Jun Co. receives a $6,000, 90-day, 12% note from customer Ryan Albany as payment on his $6,000 account.

1.

Prepare the journal entry assuming the note is honored by the customer on October 31, 2013.

Aug 2 2013 Notes Receivable 6000 Dr

Accounts Receivable 6000 Cr

Oct 31 2013 Interest Receivable 180 Dr

Interest Revenue 180 Cr

Oct 31 2013 Cash 6180 Dr

Notes Receivable 6000 Cr

Interest Receivable 180 Cr

Explanation:

When the note is received, the customer account will be closed and accounts receivable will be credited while a new asset of notes receivable will be created and notes receivable is debited.

The interest on notes receivable is calculated assuming a 360 day year and the 12% is annual interest rate.

The interest on note is 6000 * 0.12 * 90/360 = $180

The interest is income so wull be credited while as it is receivable, the interest receivable will be debited.

On 31 October when the note is honored and cash is received, it will be total of principal + interest so cash = 6000 + 180 = 6180

As a result, the assets notes and interest receivables will be closed and credited against cash.