On October 31, 2020, Kiwi Inc. lent $ 63,000 to Plum Inc. in return for a three-month, 4% interest-bearing note. What adjusting entry should Kiwi Inc. make on December 31, 2020, in connection with this note?

Question

Quizplus · Accepted Answer

Kiwi Inc. needs to make an adjusting entry for the accrued interest on the note receivable from Plum Inc. As the note is for three months and interest is 4%, the interest accrued for two months (from November 1 to December 31) will be:

$63,000 × 4% × 2/12 = $420

Therefore, Kiwi Inc. should debit Interest Receivable and credit Interest Revenue, both for $420, on December 31, 2020. This represents the recognition of interest earned on the note during the period. Option A is incorrect because it involves crediting Interest Revenue with $630, which would be the full interest amount earned over three months rather than two. Option B is incorrect because it involves debiting Cash with $420, which would mean receiving the interest in cash rather than accruing it. Option D is incorrect because it involves debiting Interest Revenue and crediting Interest Receivable in reverse, which would not be in accordance with accounting principles.