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On June 1,2018,Jensen Company acquired an 8%,ten-month note receivable from a customer in settlement of an existing account receivable of $130,000.Interest and principal are due at maturity.
-The proper adjusting entry at December 31,2018,with regard to this note receivable includes a:
A)Debit to Cash of $6,067.
B)Debit to Notes Receivable of $10,400.
C)Credit to Interest Revenue of $10,400.
D)Debit to Interest Receivable of $6,067.

Question

Quizplus · Accepted Answer

The correct answer involves calculating the interest for the period the note has been held within the fiscal year. The note's annual interest rate is 8%, but since it's a ten-month note and we're adjusting for the end of the year (which would be 7 months into the note's term by December 31, 2018), we calculate interest for 7 months. The interest amount is $130,000 * 8% * (7/12) = $6,067. This amount hasn't been received in cash yet, so it's recognized as Interest Receivable, not as a debit to Cash or Notes Receivable, and not as a credit to Interest Revenue at this point.

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