Accounting explanation needed?

Company Milner sold goods to Tung co, for 30000 on Nov 1 2010, accepteing Tungs 30000,6 month 6% note. Prepare MIlners nov 1, dec 31 annual adjusting entry and May 1 entry for the collection of the note and interest.

I understand nov 1

but can not understand Dec 31 and May 1 entries.which are

12/31/10 Interest Receivable ....................................... 300

to Interest Revenue

(\$30,000 X 6% X 2/12)..................... 300

5/1/11 Cash................................................................... 30,900

to Notes Receivable................................ 30,000

to Interest Receivable ............................ 300

to Interest Revenue

(\$30,000 X 6% X 4/12)...................... 600

to means credit by the way. i would be very glad if u can explain me this, Thank you very ver very much i am thinking on this for 20 minutes already, and i know that this should be simple and that drives me crazy. :((

Relevance
• Sandy
Lv 7
7 years ago

Company Milner sold goods to Tung co, for \$30,000 on Nov 1 2010, accepting Tung's \$30,000, 6 month 6% note.

Nov 1 2010

Dr Notes receivable \$30,000

Cr Sales \$30,000

12/31/10

Dr Interest receivable 300

Cr Interest Revenue 300

(\$30,000 x 6% x 2/12 because the principal amount is \$30,000, the rate is 6% p.a., and you only want to record interest for Nov. and Dec., i.e. two months out of a year, hence 2/12)

5/1/11

Dr Cash 30,900 (note 1)

Cr Interest revenue 600 (note 2)

Cr Interest receivable 300 (note 3)

Note 1

When the note matures on May 1, Milner will collect the principal \$30,000 plus the interest at 6% p.a. for 6 months, i.e. \$30,000 x 6% x 6/12 = \$900 to give a total of \$30,900

Note 2

As seen above, total interest revenue was \$900, but \$300 was accrued in the previous year, so that leaves \$600 interest revenue to be earned this year. Explained another way, 6 months' interest was \$900, we have accrued 2 months' interest last year, so now we recognise 4 months' interest, so \$30,000 x 6% x 4/12 = \$600.

Note 3

On Dec 31 of the previous year, we accrued \$300 under interest receivable (with a debit), so now on May 1, when we receive the money, we close off interest receivable account (with a credit)