On July 1, 2014, Falcon Company received a $20,000 promissory note from Jordyn Company.The annual interest rate is 5%.Principal and interest are paid in cash at the maturity date of June 30, 2015.
If Falcon's fiscal year ends September 30, 2014, an adjusting entry is needed to:

Question

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Falcon's fiscal year end is September 30, which means that they have nine months left until the maturity date of the promissory note. During this time, they will accrue interest revenue of $250 ([$20,000 x 5%] x 9/12). Therefore, an adjusting entry is needed to increase interest receivable by $250 to reflect the amount of interest that Falcon has earned but has not yet received in cash. Option A is incorrect because the interest revenue has not yet been earned, and therefore should not be recognized until it is accrued. Option B is incorrect because it does not reflect the interest that Falcon has earned on the promissory note. Option D is incorrect because it overstates the amount of notes receivable.

On July 1, 2014, Falcon Company Received a $20,000 Promissory