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. :((

1 Answer

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  • Sandy
    Lv 7
    7 years ago
    Favorite Answer

    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)

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