Question

A customer borrowed $10,000 from us in late October. As of December 31 they owe us $200 of interest that they will pay when they pay off the principal amount on January 7. By January 7 they end up owing another $50 of interest; on that date, the customers pays us the entire amount they owe. Give the adjusting entry to record in the interest earned as of December 31.

Answer 1

To adjust for the interest earned by December 31, debit Interest Receivable for $200 and credit Interest Income for $200. This reflects revenue earned in the period it accrued, according to the accrual basis of accounting.

Step-by-step explanation:

The adjusting entry to record the interest earned as of December 31 for a customer who borrowed money would involve debiting Interest Receivable and crediting Interest Revenue. Since the customer owes $200 of interest that has accrued by December 31 but will not be paid until January 7, the adjusting entry on December 31 would be to record this accrued interest.

The adjusting entry would be:

• Debit Interest Receivable $200
• Credit Interest Income $200

This accounting entry recognizes the revenue earned from the interest in the period it was earned, which aligns with the accrual basis of accounting.