Question - 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)
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.)