David's Loan loaned $2,000,000 to a customer on July 1, 2016, with an interest rate of 6% per year. No interest is scheduled to be paid until the loan is due, on June 30, 2017. The customer has not paid any interest yet. What adjustment, if any, is needed by the bank on December 31, 2016?
A) An increase in cash of $60,000 and an increase in equity and interest revenue of $60,000
B) An increase in interest receivable of $60,000 and an increase in equity and interest revenue of $60,000
C) An increase in interest receivable of $120,000 and an increase in equity and interest revenue of $120,000
D) No adjustment is needed

Question

Quizplus · Accepted Answer

Since the interest is not scheduled to be paid until June 30, 2017, the bank has not earned any interest revenue as of December 31, 2016. However, the bank has already earned 6 months’ worth of interest, which amounts to $60,000 (6% of $2,000,000) for the period from July 1, 2016 to December 31, 2016. Therefore, the bank should recognize interest revenue of $60,000 and increase its interest receivable by the same amount. There is no impact on cash or equity at this point.

David's Loan Loaned $2,000,000 to a Customer on July 1