Milan Tyers has an account receivable for $18 000 from Sunderland Ltd that is overdue. Sunderland requests a 60-day extension of the payment date and Cheung Ltd agrees by accepting a fixed 60-day, 14% promissory note in exchange for the accounts receivable. Which of the following is the entry Milan Tyers makes on receipt of the note?

Question

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Milan Tyers should debit bills receivable for the full amount of the note, $18,414.25. They should credit accounts receivable for the amount of the overdue payment, $18,000. They should also credit unearned interest for the amount of interest that has not yet been earned, which is calculated by multiplying the principal of the note ($18,000) by the interest rate (14%) by the time period (60/365). This calculation yields $414.25, which is credited to unearned interest.

Milan Tyers Has an Account Receivable for $18 000 from Sunderland