On March 14, Zest Co. accepted a 120-day, 6% note in the amount of $5,000 from AZC Co., a customer. On the due date of the note, AZC dishonors the note and fails to pay. The journal entry that Zest would make to record the failure to pay this note on the due date would include a debit to:Multiple choice question.Cash for $5,100Cash for $5,000Notes Receivable for $5,000Notes Receivable for $5,100Accounts Receivable - AZC for $5,000Accounts Receivable - AZC for $5,100
Question
On March 14, Zest Co. accepted a 120-day, 6% note in the amount of 5,100Cash for 5,000Notes Receivable for 5,000Accounts Receivable - AZC for $5,100
Solution
The correct answer is: Accounts Receivable - AZC for $5,100.
Here's the step-by-step explanation:
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When Zest Co. accepted the note, they would have made a journal entry to debit Notes Receivable and credit Accounts Receivable - AZC for $5,000. This recognizes that AZC Co. owes them money via a note rather than an open account.
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The note has a 6% interest rate for 120 days. To calculate the interest: 100. The total amount due at the end of the note's term is 100 (interest) = $5,100.
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When AZC Co. fails to pay on the due date, Zest Co. needs to recognize that the note is no longer collectible but that AZC Co. still owes them the money. They would debit (increase) Accounts Receivable - AZC for the total amount due, $5,100, and credit (decrease) Notes Receivable for the same amount. This moves the debt from Notes Receivable to Accounts Receivable.
So, the journal entry would be:
- Debit: Accounts Receivable - AZC $5,100
- Credit: Notes Receivable $5,100
This recognizes that the money is still owed, but is now an open account receivable rather than a note receivable.
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