Question

On March 1, Terrell & Associates provides legal services to Whole Grain Bakery regarding some recent food poisoning complaints. Legal services total $10,600. In payment for the services, Whole Grain Bakery signs a 10% note requiring the payment of the face amount and interest to Terrell & Associates on September 1. Required: For Terrell & Associates, record the acceptance of the note receivable on March 1 and the cash collection on September 1.

Answer 1

Answer:

March 1: Recording of Note Receivable

Debit note receivable account with $10,600

Credit account receivable -  Whole Grain Bakery with $10,600.

September 1: Recording of  cash collection

Debit cash account with $10,600

Credit note receivable account with $10,600.

Explanation:

This is an example of note receivable which is a written promise to receive certain amount of money from a customer or client to whom a good supplied or service rendered at a future date, with or without interest.

Note receivable is a current asset and it is recorded under current asset in the balance sheet.

Since there is no interest added to the principal amount of $10,600 indicated in the question, the following will be how the acceptance by Terrell & Associates of the note receivable on March 1:

March 1: Recording of Note Receivable

Debit note receivable account with $10,600

Credit account receivable -  Whole Grain Bakery with $10,600.

September 1: Recording of  cash collection

Debit cash account with $10,600

Credit note receivable account with $10,600.

The implication of the above is that after the payment on September 1, the total current account will not change since both cash that increased and note receivable that fell are components of current asset.