Lemming makes an $18,750,120-day,8% cash loan to Notions Co.on November 1.Lemming's end-of-period adjusting entry on December 31 should be:
A)Debit Cash for $250; credit Notes Receivable $250.
B)Debit Interest Revenue $500; credit Notes Receivable $500.
C)Debit Interest Receivable $250; credit Interest Revenue $250.
D)Debit Interest Receivable $500; credit Interest Revenue $500.
E)Debit Notes Receivable $500; credit Interest Revenue $500.

Question

Quizplus · Accepted Answer

C)Debit Interest Receivable $250; credit Interest Revenue $250.To calculate the interest for the period from November 1 to December 31 (61 days), use the formula: Principal * Rate * Time = Interest. Here, Principal = $18,750, Rate = 8% (or 0.08 as a decimal), Time = 61/365 (since interest rates are annual and there are 61 days out of a 365-day year). The calculation is $18,750 * 0.08 * (61/365) = $250. This interest hasn't been paid by December 31, so it's recorded as Interest Receivable (an asset) and Interest Revenue (reflecting the income earned).

Lemming Makes an $18,750,120-Day,8% Cash Loan to Notions Co