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On January 15, 2018, Crane Company received a two-month, 9%, $8000 note from William Pentel for the settlement of his open account. The entry by Crane Company on March 15, 2018 if Pentel dishonors the note and collection is expected is:___________
A. Accounts Receivable—W. Pentel 7880
Interest Lost 120
Notes Receivable 8000
B. Bad Debt Expense 8120
Notes Receivable 8120
C. Accounts Receivable—W. Pentel 8120
Notes Receivable 8000
Interest Revenue 120
D. Accounts Receivable—W. Pentel 8000
Notes Receivable 8000

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Answer:

Option B.

Dr Bad Debt Expense 8120

Cr        Notes Receivable 8120

Explanation:

The liability was of $8000 which excludes the interest income of 9% on it which is for 2 months.

So the total liability = $8000 + $8000*9%*2/12 = $8120

The double entry would include the decrease in the note receivable and increase in the bad debts expense with the same amount. So the entry is as under:

Dr Bad Debt Expense 8120

Cr        Notes Receivable 8120

Hence the correct option is Option B.