Question

A bank lent $100,000 to a customer on December 1 that required the customer to pay an annual percentage rate (APR) of 12% on the amount of the loan. The loan is due in six months and no payment of interest or principal is to be made until the note is due on May 31. The bank prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that the bank will be making for its accounting records.

What date should be used to record the December adjusting entry?

Answer 1

The bank should record the adjusting entry for the interest income on the loan on December 31. Monthly financial statements require the bank to recognize interest income each month, with the monthly interest for a $100,000 loan at a 12% APR being $1,000.

Step-by-step explanation:

The date that should be used to record the December adjusting entry for the bank loan would be December 31. Since the bank prepares monthly financial statements, interest income needs to be recognized each month, even though no actual payment has been received. To calculate the interest for one month, you take the annual interest rate and divide it by 12 (since there are 12 months in a year). In this case, for a $100,000 loan at an annual percentage rate (APR) of 12%, the monthly interest would be $1,000 (100,000 x 12% / 12). However, given the note due on May 31 and that no payments are made until this date, the bank would recognize interest accrued for each month leading up to the due date on the last day of each month.