On September 1, Horn Co. accepted a 60-day, 5% note in the amount of $3,000 from a customer. On the due date of the note, the customer dishonors the note and fails to pay. The journal entry that Horn would make on the due date would include debit to:Multiple choice question.Cash for $3,150Cash for $3,000Accounts Receivable for $3,025Accounts Receivable for $3,150Accounts Receivable for $3,000Cash for $3,025
Question
On September 1, Horn Co. accepted a 60-day, 5% note in the amount of 3,150Cash for 3,025Accounts Receivable for 3,000Cash for $3,025
Solution
The correct answer is "Accounts Receivable for $3,150".
Here's the step-by-step explanation:
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The note was issued on September 1 and it's a 60-day note. So, it's due on October 30 (30 days in September + 30 days in October = 60 days).
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The face value of the note is $3,000 and the interest rate is 5%. However, the interest is calculated for the 60-day period, not for a full year.
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To calculate the interest, you would use the formula: Face Value of Note x Interest Rate x (Time in terms of one year). So, it would be 25.
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Therefore, the total amount due on the note (principal + interest) is 25 = $3,025.
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However, the customer dishonors the note and fails to pay. So, instead of debiting Cash (which would have been the case if the customer had paid the note), Horn Co. would debit Accounts Receivable for the full amount due, which is 125 (interest for the additional 30 days till year end) = $3,150.
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Hence, the correct answer is "Accounts Receivable for $3,150".
Similar Questions
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