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)

Question

Quizplus · Accepted Answer

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 effect on liabilities or stockholders' equity.

When a Company Accepts a Note in Settlement of a Past