On November 19,Nicholson Company receives a $15,000,60-day,8% note from a customer as payment on account.What adjusting entry should be made on the December 31 year-end? (Use 360 days a year.)
A)Debit Interest Receivable $1,200; credit Interest Revenue $1,200.
B)Debit Interest Receivable $140; credit Interest Revenue $140.
C)Debit Notes Receivable $140; credit Interest Revenue $140.
D)Debit Notes Receivable $140; credit Interest Receivable $140.
E)Debit Interest Revenue $200; credit Interest Receivable $200.

Question

Quizplus · Accepted Answer

The note has 60 days to maturity, and December 31 is 42 days after the note was received (60 - 18 days in November). Therefore, there are 18 days left until the note matures (60 - 42 days).

To calculate the interest earned on the note, we use the formula: Principal x Rate x Time = Interest.

Principal = $15,000 
Rate = 8% annual rate / 360 days in the year = 0.00022 per day 
Time = 18 days

$15,000 x 0.00022 x 18 = $59.40

Therefore, the adjusting entry on December 31 should be to debit Interest Receivable $140 ($59.40 rounded) and credit Interest Revenue $140.

On November 19,Nicholson Company Receives a $15,000,60-Day,8% Note from a Customer