Johnson accepts a $5,000,7%,100-day promissory note from Adam on November 1.What is the adjusting entry made by Johnson on December 31 to recognize the interest (using a 360-day year)?
A)Debit Interest Expense; credit Interest Payable for $58.33
B)Debit Interest Expense; credit Interest Payable for $97.22
C)Debit Interest Receivable; credit Interest Income for $58.33
D)Debit Interest Receivable; credit Interest Income for $97.22

Question

Quizplus · Accepted Answer

The interest for 100 days on a $5,000 note at 7% interest (using a 360-day year) is calculated as follows: Interest = Principal × Rate × Time = $5,000 × 7% × (100/360) = $97.22. However, since the note was issued on November 1 and the adjusting entry is made on December 31, only 60 days of interest should be recognized in the current year. Thus, the interest for 60 days is: $5,000 × 7% × (60/360) = $58.33. This interest is not yet paid but earned, so it should be recorded as Interest Receivable (an asset) and Interest Income (reflecting the earned income).

Johnson Accepts a $5,000,7%,100-Day Promissory Note from Adam on November