On November 1, 2017, Blue Company borrowed from Yellow Bank and received a 9-month note for $60,000 at a 5% interest rate. Interest will be paid at maturity. Record the journal entries for both Blue Company and Yellow Bank (1) at the date of the sale (November 1, 2017), (2) at December 31, 2017, and (3) at maturity (August 1, 2018).

In the books of Blue Company:

November 1, 2017:

Debit Cash                                           $60,000

Credit Note payable                            $60,000

(To record borrowed note from Yellow Bank)

December 31, 2017:

Debit Interest expense                            $500

Credit Interest payable                            $500

(Interest expense recognition on note for 2 months)

August 1, 2018:

Debit Note payable                             $60,000

Debit Interest payable                           $2,250

Credit Cash                                          $62,250

(To record settlement of note at maturity)

In the books of  Yellow Bank:

November 1, 2017:

Debit Note receivable                        $60,000

Credit Cash                                         $60,000

(To record note receivable from Blue Company)

December 31, 2017:

Debit Interest receivable                        $500

Credit Interest revenue                           $500

(Interest revenue recognition on note for 2 months)

August 1, 2018:

Debit Cash                                         $62,250

Credit Note receivable                     $60,000

Credit Interest receivable                   $2,250

(To record note collection at maturity)

Explanation:

Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest expense / revenue on the notes is calculated as: Principal x Interest Rate x Time

In this case, the total interest expense / revenue is $60,000 x 5%/12 x 9 months = $2,250.

Monthly interest expense / revenue is therefore $2,250 / 9 months = $250.

Therefore, interest expense / revenue recognition for 2 months will be $250 x 2 months (November 1 - December 31) = $500.

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