Prepare Dold's Journal entry for the recognition of interest for the Second year of the note.
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At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
![**Interest Recognition for Zero Interest Bearing Note**
In this example, Dold Acrobats lent $16,529 to Donaldson, Inc., in exchange for Donaldson's 2-year, $20,000, zero interest bearing note. The implied interest rate for this loan is 10%.
**Task:**
Prepare Dold's journal entry for the recognition of interest for the first year of the note.
**Journal Entry:**
- **Cash:** $3,471
This entry reflects the amount of interest recognized in the first year, calculated based on the implied interest rate of 10% on the loaned amount.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd8f0b0f2-ea3a-4ad5-a43a-b584eea1f738%2F907d335f-76b1-4f6b-a7a4-98bdc5f31e9e%2Frsmhd2f_processed.jpeg&w=3840&q=75)
![**Title:** How to Prepare a Journal Entry for a Zero Interest Bearing Note
**Introduction:**
In this example, we will look at how to prepare a journal entry for the recognition of interest on a zero-interest-bearing note, specifically for the second year of the note's duration.
**Scenario:**
Dold Acrobats lent $16,529 to Donaldson, Inc., in exchange for a zero-interest-bearing note. The principal amount of the note is $20,000, with a term of 2 years. The implied interest rate is 10%.
**Objective:**
Prepare Dold's journal entry for the recognition of interest for the second year of the note.
**Journal Entry:**
- **Discount on Notes Payable:** $1,818
This entry reflects the amortization of the discount on notes payable, which represents the interest expense recognized over the period since the note does not bear explicit interest.
**Conclusion:**
This journal entry records the recognition of interest for the second year, capturing the effective interest on a zero-interest-bearing note over its duration. This accounting treatment ensures that the financial statements accurately reflect the cost of borrowing, even when no cash interest payments are made.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd8f0b0f2-ea3a-4ad5-a43a-b584eea1f738%2F907d335f-76b1-4f6b-a7a4-98bdc5f31e9e%2Fq1d1zoe_processed.jpeg&w=3840&q=75)
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Actual amount lented by Dold Acrobats = $16529
Note value = $20000
Calculation of Interest: -
1st year Interest = $16529*10% = $1653
2nd year Interest = $16529 + $1653 = $18182 * 10% = $1818
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