Question

Harper Company lends Hewell Company $40,000 on March 1, accepting a four-month, 6% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared?

a. Interest Receivable 800
Interest Revenue 800
b, Notes Receivable 40,000
Cash 40,000
c. Interest Receivable 200
Interest Revenue 200
d. Cash 200
Interest Revenue 200

Answer 1

The adjusting entry that should be made before the financial statements can be prepared is: Interest Receivable 800, Interest Revenue 800. Option (A) is correct.

Step-by-step explanation:

The adjusting entry that should be made before the financial statements can be prepared is:

a. Interest Receivable 800, Interest Revenue 800

This entry is necessary because only one month has passed since the note was issued, so the interest earned for that month needs to be recognized as revenue and recorded as an asset. The amount calculated as interest earned is $40,000 x 6% x (1/12) = $800.

An adjusting journal entry is a financial record you can use to track unrecorded transactions. Some common types of adjusting journal entries are accrued expenses, accrued revenues, provisions, and deferred revenues. You can use an adjusting journal entry for accrual accounting when accounting periods transition.

There are three main types of adjusting entries: accruals, deferrals, and non-cash expenses. Accruals include accrued revenues and expenses. Deferrals can be prepaid expenses or deferred revenue.