Harper Company lends Hewell Company $40,000 on March 1,accepting a four-month,6% interest note.Harper Company prepares financial statements on March 31.What adjusting entry should be made before the financial statements can be prepared?

Question

Quizplus · Accepted Answer

Since the interest on the note is not due until it matures in four months, interest revenue needs to be accrued for the month of March. This can be achieved by making an adjusting entry to increase interest receivable and interest revenue by $200 (i.e., $40,000 x 6% x 1/12). Option A is not correct because it records cash instead of interest revenue, which is not appropriate at this stage. Option B is incorrect because it overstates the interest revenue by recording the full amount of interest for four months. Option D is not relevant since these accounts were already recorded when the note was issued.

Harper Company Lends Hewell Company $40,000 on March 1,accepting a Four-Month,6