Question

On July 1, 2014, Falcon Company received a $20,000 promissory note from Jordyn Company. The annual interest rate is 5%. Principal and interest are paid in cash at the maturity date of June 30, 2015. If Falcon’s fiscal year ends September 30, 2014, an adjusting entry is needed to:a. Increase interest revenue by $1,000b. Increase notes receivable by $250c. Increase interest receivable by $250d. Increase notes receivable by $1,000

Answer 1

Answer:

c. Increase interest receivable by $250

Explanation:

The question says that the interest and notes receivable amount will be received at maturity and till then the note is an asset while any interest accrued on the note will be our interest revenue and it will also be a current asset as it will be classified as receivable.

We calculate the interest on note receivable,

• 20000 * 0.05 = 1000
• 1000 is the total interest that will be receivable after one year on this notes of 20000
• The interest for the period from July to September is 1000 * 3/12 = 250
• So the interest income pertaining to the period ended 30 September is $250
• This will be recorded by the adjusting entry on 30 Sep as,

Interest Receivable    250 Dr

      Interest Income      250 Cr

So, the answer is C.