Question

Assume that Dress Right loaned another corporation $30,000 at the beginning of July. Terms of the note call for the payment of principal, $30,000, and interest at 8% in three months. What is the adjusting entry for interest revenue at the end of July?

A) Debit Interest Revenue $600, Credit Interest Receivable $600
B) Debit Interest Receivable $600, Credit Interest Revenue $600
C) Debit Interest Revenue $2,400, Credit Interest Receivable $2,400
D) Debit Interest Receivable $2,400, Credit Interest Revenue $2,400

Answer 1

The correct adjusting entry for the interest revenue at the end of July is to debit Interest Receivable and credit Interest Revenue for $200, recognizing the interest earned on a $30,000 loan at 8% annual interest rate for one month.

Step-by-step explanation:

To calculate the adjusting entry for interest revenue at the end of July, we need to determine how much interest has accrued on the $30,000 loan for one month, given an annual interest rate of 8%. The formula to calculate the monthly interest is:

Interest = Principal × Annual Interest Rate × (Number of Months / 12)

Plugging in the values gives us:

Interest = $30,000 × 0.08 × (1/12) = $200

Therefore, at the end of July, Dress Right has earned $200 in interest that has not yet been received, hence the adjusting entry would be:

Debit Interest Receivable $200, Credit Interest Revenue $200

This adjustment ensures that the interest revenue is recognized in the period it is earned, in accordance with the accrual basis of accounting. The correct answer is Option B: Debit Interest Receivable $600, Credit Interest Revenue $600, adjusted to the correct amounts of $200.