Question

On December 1, Bright Company receives a 6% interest-bearing note from Galvalume Company to settle a $20,000 account receivable. The note is due in three months.
At December 31, Bright should record interest revenue of (rounded to the nearest dollar):

a) $100. b) $600. c) $0. d) $200.

Answer 1

Answer:

a) $100

Explanation:

The adjusting entries are prepared at the end of the period and in this case, we assume that the adjusting entries are prepared on 31 December.

To calculate the interest revenue on the note, we need to understand that the rate that is 6% is the annual interest rate. Thus, the interest revenue for the year will be,

• Interest = 20000 * 0.06 = $1200

However, the note is only for 3 months starting from December and by the end of December, only one month's interest revenue is earned, then the interest revenue at 31 December will be,

• Interest revenue = 1200 / 12 = $100

The entry will be,

31 Dec  Interest Receivable   $100 Dr

                      Interest Revenue  $100 Cr