Final answer:
Starr Corporation needs to make an adjusting entry to recognize the interest income earned from December 1 to December 31, 2014, on the 3-month, 8% interest-bearing note. The entry would involve debiting Interest Receivable and crediting Interest Revenue for the calculated interest earned in December.
Step-by-step explanation:
The student is asking about the adjusting entry that Starr Corporation should make for interest income from a loan it provided to another corporation.
Since the loan was given on December 1, 2014, and is a 3-month, 8% interest-bearing note, Starr Corporation needs to recognize the interest income earned from December 1 to December 31, 2014.
To calculate the interest for one month, you use the formula:
Interest = Principal × Annual Interest Rate × (Number of days/365)
For Starr Corporation, this calculation would be:
Interest = $450,000 × 8% × (31/365)
Once the interest amount is calculated, the adjusting entry on December 31 would be a debit to Interest Receivable and a credit to Interest Revenue for the amount of interest earned in December.