Accompanying a bank statement for Borden Company is a credit memo for $21,200 representing the principal ($20,000) and interest ($1,200) on a note that had been collected by the bank. The company has been notified by the bank at the time of the collection but had made no entries.

The journal entry to record this note collection carried out by the bank should be:

Dr Cash 21,200

    Cr Notes receivable 20,000

    Cr Interest revenue 1,200

Explanation:

Notes receivable is an asset account and it probably represented a sale made on credit by the company, so when it was collected, the amount should decrease and that is done by crediting it.

On the other hand, since only $20,000 belonged to the note, the rest ($1,200) must be recorded as interest revenue. Revenues are always credited.