On July 1, 2016, 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, 2017.
If Falcon's fiscal year ends September 30, 2016, an adjusting entry is needed to:

Question

On July 1, 2016, 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, 2017. ​
If Falcon's fiscal year ends September 30, 2016, an adjusting entry is needed to:

Quizplus · Accepted Answer

At September 30, 2016 (end of Falcon's fiscal year), three months of interest have accrued on the note (July, August, September). Interest expense is recognized using the accrual basis of accounting, which requires the matching of expenses to revenues earned during the period. Since Falcon has earned $1,000 ($20,000 x 5% x 3/12) of interest revenue, but has not yet received the cash, an adjusting entry is necessary to increase interest receivable by $1,000. Therefore, the correct answer is C because it increases interest receivable by $250.

On July 1, 2016, Falcon Company Received a $20,000 Promissory