Asked by Desiree Hunter on May 14, 2024
Verified
When a company accepts a note in settlement of a past due account, what is the effect on the accounting equation?
A) an increase in a liability and a decrease in an asset
B) an increase in an asset and a decrease in an asset
C) a decrease in an asset and a decrease in stockholders' equity (expense)
D) a decrease in a liability and an increase in stockholders' equity (revenue)
Note Settlement
The process of satisfying the obligations of a promissory note, typically involving the repayment of the principal and accrued interest.
Past Due Account
An account that has not been paid by the deadline, resulting in overdue payments.
Accounting Equation
The fundamental formula in accounting that represents the relationship between assets, liabilities, and equity: Assets = Liabilities + Equity.
- Understand the financial consequences and the process of recording notes receivable in journals, along with computing interest and determining maturity values.
Verified Answer
HS
Harsimran SinghMay 21, 2024
Final Answer :
B
Explanation :
When a company accepts a note in settlement of a past due account, it is essentially exchanging one asset (the account receivable) for another asset (the note receivable). This results in an increase in one asset (note receivable) and a decrease in another asset (accounts receivable), with no immediate impact on liabilities or stockholders' equity.
Learning Objectives
- Understand the financial consequences and the process of recording notes receivable in journals, along with computing interest and determining maturity values.