Question

First state bank lends dorchester company $100,000 on march 1, accepting a one year, 5% interest note. first state bank prepares financial statements on march 31. what adjusting entry should be made march 31 st before the financial statements can be prepared? debit note receivable 100,000; credit cash 100,000 debit accounts receivable 5,000; credit interest revenue 5,000 debit interest payable 4,167; credit interest revenue 4,167 debit interest receivable 417; credit interest revenue 417

Answer 1

The correct adjusting entry on March 31 for the interest on a bank loan would be: Debit Interest Receivable $417; Credit Interest Revenue $417, reflecting one month of interest earned on the loan.

Step-by-step explanation:

The student asks about the correct adjusting entry for a bank loan's interest at the end of a financial period. Based on the details provided, First State Bank lent Dorchester Company $100,000 at a 5% interest rate on March 1, with financial statements being prepared on March 31. The interest for one month needs to be calculated and recognized in the financial statements. The correct adjusting entry on March 31 would be to debit Interest Receivable and credit Interest Revenue because no interest has been paid yet, but it has been earned for the period of March.

To calculate the interest for one month: $100,000 loan x 5% annual interest rate = $5,000 annual interest; $5,000 / 12 months = approximately $417 interest for one month. Therefore, the correct entry would be: Debit Interest Receivable $417; Credit Interest Revenue $417.