On March 1, Terrell & Associates provides legal services to Whole Grain Bakery regarding some recent food poisoning complaints. Legal services total $10,500. In payment for the services, Whole Grain Bakery signs a 8% 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.

March 1

Note Receivable                    $10500 Dr

    Accounts Receivable                  $10500 Cr

September 1

Cash                                 10920 Dr

     Note Receivable               10500 Cr

     Interest Revenue              420 Cr

Explanation:

March 1.

The acceptance of note receivable by Terrell would mean that Terrell would create a new asset in the book namely Note receivable for $10500 and write off the asset named Accounts receivable against this amount. Thus, the entry would be to debit the note receivable and credit the accounts receivable.

September 1.

The Note pays interest at 8% annual rate. The note remains outstanding for 6 months from March to August. Thus, Terrell would receive the interest on note at 8% annual interest rate for 6 months. The amount of Interest revenue would be,

Interest revenue = 10500 * 0.08 * 6/12 = $420

Terrell would receive cash equal to the value of note receivable plus the interest on note receivable.

So, cash received would be = 10500 + 420 = 10920

Terrell will debit cash as it is received and credit the asset note receivable for 10500 to write it off and record interest revenue of $420