On November 1, Jovel Company loaned another company $100,000 at a 6.0% interest rate. The note receivable plus interest will not be collected until March 1 of the following year. The company's annual accounting period ends on December 31, and adjustments are only made at year-end. The adjusting entry needed on December 31 is:
A) Debit Interest Receivable, $500; credit Interest Revenue, $500.
B) Debit Interest Receivable, $1,000; credit Interest Revenue, $1,000.
C) No entry required.
D) Debit Interest Expense, $1,000; credit Note Payable, $1,000.
E) Debit Interest Expense, $5,000; credit Interest Payable, $5,000.

Question

Quizplus · Accepted Answer

Interest on the note receivable is calculated using the formula: Principal x Rate x Time. In this case, the principal is $100,000, the rate is 6%, and the time is 2 months (November and December). So, the interest earned on the note is $1,000 ($100,000 x 6% x 2/12).

Since the interest earned is not yet received, it is recorded as Interest Receivable (an asset account). To recognize the revenue earned, Interest Revenue (an income account) is credited.

Therefore, the adjusting entry needed on December 31 is:
Debit Interest Receivable, $1,000; credit Interest Revenue, $1,000.

On November 1, Jovel Company Loaned Another Company $100,000 at a 6.0