Question

Starr Corporation loaned $600,000 to another corporation on December 1, 2020 and received a 3-month, 8% interest-bearing note with a face value of $600,000. What adjusting entry should Starr make on December 31, 2020?

a. Debit Interest Receivable and credit Interest Revenue, $12,000.
b. Debit Cash and credit Interest Revenue, $4,000.
c. Debit Interest Receivable and credit Interest Revenue, $4,000.
d. Debit Cash and credit Interest Receivable, $12,000.

Answer 1

The adjusting entry that Starr Corporation should make on December 31, 2020 is to debit Interest Receivable and credit Interest Revenue, $12,000.

Step-by-step explanation:

The adjusting entry that Starr Corporation should make on December 31, 2020 is option a. Debit Interest Receivable and credit Interest Revenue, $12,000.

Since the note has a face value of $600,000 and an 8% interest rate for 3 months, the interest for one month would be $4,000 ($600,000 * 8% / 12 months). Since December has one month remaining in the 3-month period, the adjusting entry would be $12,000 ($4,000 * 3 months).