Final answer:
The adjusting entry on December 31 for the interest earned on a certificate of deposit invested on June 30 would involve debiting Interest Receivable and crediting Interest Income for six months' worth of accrued interest, calculated at $20,000 × 12% × 6/12, which equals $1,200.
Step-by-step explanation:
The student's question pertains to the accounting treatment of interest earned on a certificate of deposit for a period that has not yet completed at the end of the accounting year. On June 30, 2010, a company invested $20,000 in a certificate of deposit that yields 12% interest at the end of one year. When preparing the adjusting entry for December 31, we need to recognize the interest that has accrued but not yet been received. Since the certificate of deposit matures after one year, only six months of interest would have accrued by December 31.
The accounts affected in the adjusting entry are Interest Receivable (an asset account) for the interest that is accrued but not yet received, and Interest Income (a revenue account) for the increase in earnings that have yet to be realized in cash. The entry would be as follows:
- Debit Interest Receivable for $1,200 (which is $20,000 × 12% × 6/12 for six months' worth of interest).
- Credit Interest Income for $1,200 (to record the revenue earned from the CD).
This adjusting entry ensures that the company's financial statements reflect the interest earned to date, adhering to the accrual basis of accounting.