Absolute Appliances
The company sold merchandise to a customer on December 1, 2019, for $120,000. The company accepted a promissory note as payment. The note has a term of three months and an annual interest rate of 10%. The company's accounting period ends on December 31.
-Refer to Absolute Appliances. What amount should the company recognize as interest revenue in 2020?

Question

Quizplus · Accepted Answer

The term of the note is for three months, which means it will mature on March 1, 2020. Since the accounting period ends on December 31, 2019, only one month of interest income can be recognized in 2019 (December 1 - December 31). The interest income for that one month is calculated as follows:

Principal amount of the note x Annual interest rate x Time period 
= $120,000 x 10% x 1/12 
= $1,000

Therefore, the company should recognize $1,000 as interest revenue in 2019. The remaining two months of interest income will be recognized in 2020, totaling $2,000 ($120,000 x 10% x 2/12).

Absolute Appliances The Company Sold Merchandise to a Customer on December 1