Notes receivable – Basic journal entry

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Notes receivable: Basic journal entry

There are several entries required in this problem. First, an entry is made to record the receipt of the note receivable to close theAccounts Receivable – Sanchez Company account. Next, an entry is made to record the receipt of cash in payment of the note receivable.

Journal entry to record the receipt of the notes receivable

Since Cox Company sold goods on account to Sanchez Company, Sanchez Company owes money to Cox Company in the form of an account receivable. On May 2, Sanchez Company issues a note in lieu of payment on account. The journal entry simply reclassifies the account receivable as a note receivable.

To record the receipt of the note, Notes Receivable is debited (increased). The Accounts Receivable controlling account (and the Accounts Receivable – Sanchez Company subsidiary ledger account) is credited (decreased) for the balance due, thereby “closing” the account.

Journal entry to collect the note at maturity

On June 1, payment in full is received. This includes the principal and the interest on the note. The principal plus the interest on the note is called the maturity value of the note. To determine the maturity value of the note, the interest must first be calculated.

The interest amount is calculated as follows:

Interest = Principal × Rate × Time
  = $5,400 × 4% × 30360
  = $18

The maturity value of the note is calculated as follows:

Maturity Value = Principal + Interest
  = $5,400 + $18
  = $5,418

To record the receipt of the payment, Cash is debited (increased) for the total amount received, $5,418. Notes Receivable is credited (decreased) for the face value (principle amount) of the note, $5,400. And Interest Revenue is credited (increased) for the amount of interest earned, $18.

Thus, the answer is: 




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