Question

A company receives interest on a $30,000, 8%, 5-year note receivable each April 1. At December 31, 2010, the following adjusting entry was made to accrue interest receivable:Interest Receivable 1,800Interest Revenue 1,800Assuming that the company does not use reversing entries, what entry should be made on April 1, 2011 when the annual interest payment is received?a. Cash 600Interest Revenue 600b. Cash 1,800Interest Receivable 1,800c. Cash 2,400Interest Receivable 1,800Interest Revenue 600d. Cash 2,400Interest Revenue 2,400

Answer 1

Answer:

Thus, correct option is c.

Cash 2,400 Dr.

Interest Receivable 1,800 Cr.

Interest Revenue 600 Cr.

Explanation:

As per the provided information interest received each year = $30,000 $\times$ 8% = $2,400.

This interest is received on $30,000 on April 1 each year and for a period of 12 months.

That means interest for each month = $\frac{2,400}{12} = 200$

Since interest for the period = April 1  to December 31

= 9 months the remaining 3 months interest  is unearned interest for the period.

Entry will be

Cash A/c Dr.             $2,400

    To Interest Receivable        $1,800

    To Interest Revenue             $600

Because total cash collected = $30,000 $\times$ 8% = $2,400

Interest for the period of April to Dec 2010 was to be received and interest receivable was outstanding for $200 $\times$ 9 = $1,800

And income of $600 for the period of Jan to Mar 2011 will be credited to interest revenue.

Thus, correct option is c.