Question

On April 1, 2020, Clare Barry received a 5%, $600,000 note from John Edwards, a customer. The note is due on March 31, 2021. Clare Barry has a December 31st year-end. Clare Barry's entry on March 31, 2021 to record the payment received would include a credit to interest revenue of

Answer 1

Answer:

The interest revenue will be credited by $7500 on March 31, 2021.

Explanation:

The 5% interest on $600000 notes is for the whole year. The amount of interest for whole year will be = 600000 * 0.05 = $30000

The important thing to note here is that the year end for Clare Barry is on 21 December which means that on 31st December 2020, we will make adjusting entries and for such a note, an adjusting entry will be passed as,

31 Dec 2020  Interest receivable     22500 Dr

                           Interest Revenue          22500 Cr

This is because the interest of 22500 from April 2020 to December 2020 relates to the period of 2020 and using accrual principle, we will record this as revenue in 2020.

Thus, on 31 March 2021 we will record the interest revenue that pertains to the period of January 2021 to March 2021 which comes out to be,

Interest Revenue = 30000 * 3/12 = $7500

Answer 2

Answer:

$7,500

Explanation:

This can be calculated by following the simple steps below:

Total one-year interest revenue = $600,000 × 5% = $30,000

Monthly interest revenue = $30,000 ÷ 12 = $2,500

Number of relevant months in 2021 = 3 months (i.e. January 1, 2021 to March 31, 2021)

Credit to interest revenue in 2021 = $2,500 × 3  = $7,500

Therefore, Clare Barry's entry on March 31, 2021 to record the payment received would include a credit to interest revenue of $7,500.