Question

Harper Company lends Hewell Company $39,600 on March 1, accepting a four-month, 8% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared?

Answer 1

Answer:

The required adjusting entries before the financial statements can be prepared are:

Debit Note receivable                 $39,600

Credit Cash                                  $39,600

(To record note receivable)

Debit Interest receivable                 $264

Credit Interest revenue                   $264

(To record interest receivable on note - March 31)

Explanation:

Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest revenue on the note is calculated as: Principal x Interest Rate x Time

In this case, the total interest revenue is $39,600 x 8%/12 x 4 months = $1,056.

Monthly interest revenue is therefore $1,056 / 4 months = $264.