Question

Beta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Beta required the customer to sign a six-month, 11 percent promissory note on February 1, Year 2. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?

A) Both assets and liabilities decrease
B) Both assets and revenues decrease
C) Revenues decrease and liabilities increase
D) No impact on the accounting equation

Answer 1

The correct answer is option C) Revenues decrease and liabilities increase.

Step-by-step explanation:

The reclassification of the account receivable to note receivable will result in option C) Revenues decrease and liabilities increase.

When Beta Company recorded the amount due as an account receivable, it recognized revenue for the services provided. However, when the customer could not make the payment quickly, Beta required the customer to sign a promissory note. By doing so, Beta reclassified the existing account receivable as a note receivable, which represents a liability for the company.

This means that revenues will decrease because the company no longer recognizes the revenue until the customer pays according to the terms of the promissory note, and liabilities will increase because the company now has a legal right to collect the amount due from the customer.