Question
Your client owes you $1,000 for previously provided service as of October1, 2016 (A/R balance: $1,000) . To make sure cash collection, you and your
Your client owes you $1,000 for previously provided service as of October1, 2016 (A/R balance: $1,000). To make sure cash collection, you and your client agree that:
1.Youaccepta $1,000, 3-month, @12% p.a. (per annum--always annual interest) promissory note from your client as settlement of an outstanding A/Rec on Oct 1, 2016.Your client is an issuerof the promissory note. You should transferthe outstanding balance $1000 from A/Recto Notes Receivable.How much do you expect to collect theinterest income and principal on Dec 31?
a) Record the journal entry onOct 1 and Dec 31 on YOURbook. (tip: Oct 1:decrease Accounts Receivable > increase Notes Receivable)
b) Record the journal entry on Oct 1 and Dec 31 on your CLIENT's book. (tip: Oct 1: decrease Account Payable > increase Notes Payable)
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2. If you receive a 4-month, @12% p.a. note, instead, how much interest income should be recognizedon Dec 31 2016 and Jan 31 2017onYOURbook ? How much would you collect on Jan 31 2017?(Your company's fiscal year ends on December 31.)
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