Your client owes you $1,000 for previously provided service as of October 1, 2016 (A/R balance: $1,000).
Your client owes you $1,000 for previously provided service as of October 1, 2016 (A/R balance:
$1,000). To make sure cash collection, you and your client agree that:
1. You accept a $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 issuer of the promissory note. You should transfer the outstanding balance $1000 from A/Rec to Notes Receivable. How much do you expect to collect the interest income and principal on Dec 31?
a) Record the journal entry on Oct 1 and Dec 31 on YOUR book. (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 recognized on Dec 31 2016 and Jan 31 2017 on YOUR book ? How much would you collect on Jan 31 2017? (Your company’s fiscal year ends on December 31.)
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