Question

Starr Corporation loaned $90,000 to another corporation on December 1, 2010 and received a 3-month, 8% interest-bearing note with a face value of $90,000. What adjusting entry should Starr make on December 31, 2010?a. Debit Interest Receivable and credit Interest Revenue, $1,800.b. Debit Cash and credit Interest Revenue, $600.c. Debit Interest Receivable and credit Interest Revenue, $600.d. Debit Cash and credit Interest Receivable, $1,800.

Answer 1

The correct answer is c.

Debit Interest Receivable and credit Interest Revenue, $600

Step-by-step explanation:

In the question, we have to pass an adjusting entry of note receivable so for that we have to debit the interest receivable Account and credit the interest revenue Account.

The calculation of interest receivable is shown below:

= Loan amount × number of months ÷ total number of months in a year × rate

= $90,000 × 1 ÷ 12 × 8%

= $600

The 1 month is calculated from December 1, 2010 to December 31, 2010. And, we ignored the 3 month period because we have to compute till December 31.

So, the adjusting entry would be shown below:

Interest receivable Account A/c Dr $600

To Interest revenue Account $600

(Being adjusting entry recorded in respected of notes receivable)

Hence, the correct answer is c.

Debit Interest Receivable and credit Interest Revenue, $600

Answer 2

Correct option is c.

Interest Receivable A/c Dr. $600

To Interest Revenue $600

Step-by-step explanation:

Provided details,

Loaned amount = $90,000

Interest rate on note payable = 8%

Period of note payable = 3 months from 1 December 2010 to 28 Feb 2011

Since it is for 3 months but interest revenue to be received for the month of December 2010 will be recorded, in 2010 itself.

Thus, interest = $90,000
`*` 8% = $7,200

Now, interest total to be received on 3 months notes payable = 7,200
`*` 3/12 = $1,800

Interest for 1 month = $1,800/3 = $600

Thus, entry on 31 December will be:

Interest Receivable A/c Dr. $600

To Interest Revenue $600

Therefore, correct option is c.