Answer the following statements true (T) or false (F)

Question

) Interest rates are stated on an annual basis, therefore the time in the interest formula is always stated as one year.
2) On October 1, 2018, Mandy's Electronic sold merchandise in exchange for a 4 month, $50,000 note receivable, with 3% interest. Interest revenue of $500 is earned in 2018.
3) If a note receivable is outstanding at the end of an accounting period, the interest earned up to year-end is recorded as interest revenue when the cash is received.
4) Because of the revenue recognition principle, interest on a note receivable is recorded in the year in which it is earned.
5) If a credit customer fails to pay an accounts receivable, the company may ask the customer to sign a promissory note.

Answer 1

1) FALSE - Interest rates are stated on an annual basis, therefore the time in the interest formula should
be expressed in terms of a fraction of one year.
2) FALSE - 2018 Interest Revenue: $50,000 × 0.03 × 3/12 = $375
2019 Interest Revenue: $50,000 × 0.03 × 1/12 = $125
3) FALSE - If a note receivable is outstanding at the end of an accounting period, the interest earned up
to year-end is part of that year's earnings.
4) TRUE
5) TRUE