Question

On September 1, Kennedy Company loaned $128,000, at 12% annual interest, to a customer. Interest and principal will be collected when the loan matures one year from the issue date. Assuming adjustments are only made at year-end, what is the adjusting entry for accruing interest that Kennedy would need to make on December 31, the calendar year-end?

a. Debit Interest Receivable, $15,360; credit Cash, $15,360
b. Debit Interest Expense, $15,360; credit Interest Payable, $15,360
c. Debit Interest Receivable, 5,120; credit Interest Revenue, $5,120.
d. Debit Interest Expense, $5,120; credit Interest Payable, $5,120
e. Debit Cash, $5,120; credit Interest Revenue, $5,120.

Answer 1

c. Debit Interest Receivable, 5,120; credit Interest Revenue, $5,120.

Step-by-step explanation:

Given,

Loaned amount = $128,000

Annual Interest rate = 12% = 0.12

N = 1 year.

As Kennedy Company loaned on September 1, and the adjustment is needed on December 31, the interest will be due for 4 months.

Therefore, interest = $128,000 x 0.12 x (4/12)

Interest = $5,120

As Kennedy Company provided loan to its customer, interest is a revenue for the company. Therefore, Interest revenue is a credit account. As the customer does not pay the money, it is a receivable amount. Therefore, C is the correct answer.

It is not an expense, so, D is a wrong option. As customer does not pay, cash is out of question, so, E is also wrong option.