Ross Company holds a 90-day, 6 percent note for $400 from one of its customers. The customer fails to pay by the due date. Assume a 360-day year. Which of the following is the correct treatment to record the transaction?
A) Debit Accounts Receivable by $400; credit Notes Receivable by $400
B) Debit Accounts Receivable by $406; credit Notes Receivable by $400, credit Interest Income by $6
C) Debit Revenue by $400; credit Notes Receivable by $400
D) No entry unless payment is received from the customer

Question

Quizplus · Accepted Answer

Since the customer failed to pay by the due date, Ross Company needs to record the transaction as a dishonored note receivable. To do this, Ross Company should debit Accounts Receivable for the full amount due ($406) and credit Notes Receivable for the principal amount of the note ($400). Additionally, Ross Company should credit Interest Income for the interest that was included in the original note amount but not paid ($6). Therefore, the correct treatment to record the transaction is described in option B.

Ross Company Holds a 90-Day, 6 Percent Note for $400