Final answer:
To adjust for the interest accrued from August 1 to December 31, 2025, on a 9-month note receivable at 6% interest, Teal Mountain Finance Company must debit Interest Receivable for $1,170 and credit Interest Income for the same amount.
Step-by-step explanation:
The student's question pertains to the need for an adjusting entry by Teal Mountain Finance Company for the interest accrued on a 9-month note payable by Sandhill Industries. The note was issued on August 1, 2025, with a principal value of $46,800 at a 6% annual interest rate. Since Teal Mountain prepares its financial statements on December 31, 2025, it will need to account for the interest that has accrued for the 5 months from August 1 to December 31.
To calculate the amount of interest for 5 months, we can use the formula:
Interest = Principal × Interest Rate × (Number of Months / 12)
Interest = $46,800 × 6% × (5/12) = $1,170
The adjusting entry on December 31, 2025, will therefore be:
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- Debit Interest Receivable for $1,170
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- Credit Interest Income for $1,170
This entry reflects the interest income earned by Teal Mountain but not yet received, thus complying with the accrual basis of accounting.