HCF, a finance company, lends Able Business $12,000 at 5% on December 1, 2020. HCF's adjusting entry on December 31, 2020, 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 should recognize the interest earned by HCF from Able Business for the month of December. The interest amount is calculated as follows:

$12,000 x 5% x 1/12 = $50

Therefore, HCF should credit Interest Earned for $50 to recognize the revenue earned. No entry is required for Interest Receivable since the interest has already been earned and received. Choices A, B, D, and E are therefore incorrect.

HCF, a Finance Company, Lends Able Business $12,000 at 5