A company had the following transactions during the last two months of the fiscal year that ends on December 31. Adjusting entries are only made annually on December 31.

Nov.

1

Loaned $80,800 cash to CAVMAN on a 1-year, 9% note.

Dec.

11

Sold goods to WAHOO receiving a $9,800, 90-day, 9% note.

16

Received a $27,900, 6-month, 8% note to settle an open account from T. Bennett.

31

Accrued interest revenue on all notes receivable.

The journal entry on December 31 includes which of the following? (Assume 360 days to simplify computations. Round answer to the nearest dollar.)

Question

A company had the following transactions during the last two months of the fiscal year that ends on December 31.  Adjusting entries are only made annually on December 31.

Nov.

1

Loaned $80,800 cash to CAVMAN on a 1-year, 9% note.

Dec.

11

Sold goods to WAHOO receiving a $9,800, 90-day, 9% note.

16

Received a $27,900, 6-month, 8% note to settle an open account from T. Bennett.

31

Accrued interest revenue on all notes receivable.

The journal entry on December 31 includes which of the following? (Assume 360 days to simplify computations.  Round answer to the nearest dollar.)

BlackTom AI · Accepted Answer

Question restatement: A company had several notes and notes receivable activities in the last two months of the fiscal year, and adjusting entries are only made on December 31. You are asked which entry is recorded on December 31, given four options.

Option 1: Debit to Interest Revenue for $1,802.
- Here we would be recognizing interest revenue rather than interest receivable, and the amount $1,802 would imply a total interest earned by Dec 31 that differs from the computed accruals. To validate this, we would need to sum interest from all notes over the period. The 9% note from Nov 1 for 2 months (Nov 1–Dec 31) is 80,800 × 9% × (2/12) ≈ 1,212. The 9% note from Dec 11 for 90 days would accrue interest from Dec 11 to Dec 31 (20 days): 9,800 × 9% × (20/360) ≈ 49. The 8% note from Dec 16 for 6 months would accrue for Dec 16–Dec 31 (15 days): 27,900 × 8% × (15/360) = 93. Adding these gives about 1,212 + 49 + 93 = 1,354, not 1,802. Therefore this option overstates the accrual and is not correct.

Option 2: Debit to Notes Receivable for $118,500.
- Debit to Notes Receivable would imply recording principal on a note, not recognizing interest. At December 31, the principal amounts outstanding include the 80,800 loan (still outstanding), the 9,800 note from Dec 11, and the 27,900 note from Dec 16, totaling 118,500. However, the adjusting entry on December 31 for accrual of interest does not involve debiting Notes Receivable; it involves recognizing interest revenue or interest receivable to reflect interest earned but not yet received. Therefore this option does not fit typical end-of-period adjusting entries for interest and is incorrect.

Option 3: Debit to Interest Receivable for $1,354.
- This aligns with the concept of accrual accounting: interest earned on notes receivable but not yet collected is recorded as Interest Receivable. Compute each component:
  • Nov 1 loan: 80,800 × 9% × (2/12) = 1,212
  • Dec 11 note: 9,800 × 9% × (20/360) ≈ 49
  • Dec 16 note: 27,900 × 8% × (15/360) = 93
  Total accrual = 1,212 + 49 + 93 = 1,354. Thus the adjusting entry would be Debit Interest Receivable for $1,354, and Credit Interest Revenue for the same amount, or appropriate parallel entry depending on whether you’re capitalizing interest revenue or recognizing it in accounts. The amount 1,354 exactly matches the aggregate accrued interest and the debit to Interest Receivable is the correct mechanism to reflect receivable interest at year-end.

Option 4: Credit to Interest Revenue for $1,212.
- Crediting Interest Revenue would reduce revenue, which is inconsistent with accruing interest earned. At year-end, interest that has been earned but not yet collected increases Interest Revenue (if recognizing on an accrual basis) or increases Interest Receivable (if you wait to recognize revenue until receipt). Since the schedule includes multiple notes with varying accrual periods (not just the November note for 2 months), a flat credit of $1,212 ignores the additional interest earned on the December 11 and December 16 notes. Therefore this option misstates the earned revenue and is not correct.

Summary: The reasoning above demonstrates that the correct end-of-period adjusting entry must reflect the total accrued interest from all notes as of December 31, which sums to $1,354 and is recorded as a Debit to Interest Receivable (and a corresponding Credit to Interest Revenue). The other options either misstate the nature of the adjusting entry (debiting Notes Receivable or crediting Interest Revenue) or use an incorrect total amount. Note: The presentation here outlines the calculations and reasoning for each option without summarizing a final choice, per the instructional format.

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