HCF,a finance company,lends Able Business $12,000 at 5% on December 1,2015.HCF's adjusting entry on December 31,2015,should include:
A) A debit to Interest Earned for $50.
B) A credit to Interest Receivable for $50.
C) A credit to Interest Earned for $50.
D) A debit to Cash for $600.
E) A debit to Interest Expense for $600.

Question

Quizplus · Accepted Answer

The adjusting entry on December 31, 2015, should recognize the interest earned by HCF during the month of December. The interest earned on the loan can be calculated as:

$12,000 x 0.05 x (31/365) = $50.41 (rounded to the nearest cent)

Since the amount earned is less than $1, we can round it down to $50.

The adjusting entry should include a credit to interest earned for $50, which will increase HCF's income for the period. There is no need to record a debit to interest expense, as HCF has already earned the interest income. There is also no need to adjust the cash balance, as the loan and interest have already been recorded when the loan was granted. Therefore, options A, B, D, and E are not correct.

Note: It's important to recognize that interest is typically accrued daily, based on the outstanding balance of the loan. In this case, we assumed that the loan balance was $12,000 for the entire month. However, if the actual balance varied during the month, the interest earned would also change.

HCF,a Finance Company,lends Able Business $12,000 at 5% on December