Question

On March 1, 2016, Mike Dials purchased a suit at Lenny's Fine Apparel Store. The suit cost $800 and Mike used his Lenny's credit card. Lenny's charges 3% per month interest if payment on credit charges is not made within 30 days. On April 30, 2016, Mike had not yet made his payment. What entry should Lenny's make on April 30th?

Answer 1

Lenny's Fine Apparel Store should debit Accounts Receivable and credit Interest Revenue by $24 on April 30th for the interest accrued from Mike's suit purchase using the credit card.

Step-by-step explanation:

On March 1, 2016, Mike purchased a suit for $800 and used his Lenny's credit card. Lenny's charges 3% interest per month if payment is not made within 30 days. By April 30, 2016, Mike had not made his payment. To calculate the interest charged for one month, we use the formula:

Interest = Principal × Interest Rate × Time

Where Principal is the original amount charged ($800), Interest Rate is 3% per month (or 0.03 as a decimal), and Time is 1 month.

Interest = $800 × 0.03 × 1 = $24

Thus, Lenny's should make the following entry on April 30th:

• Debit Accounts Receivable $24
• Credit Interest Revenue $24