Which of the following entries records the adjustment for interest earned on an investment, but not yet collected?

Question

BlackTom AI · Accepted Answer

Interest earned but not yet collected increases a receivable and must be recognized as income under accrual accounting, so record an asset (Interest Receivable) and the corresponding revenue (Investment Income).

1. Relevant knowledge points and concepts
- Accrual basis accounting: revenues are recognized when earned, not when cash is received.  
- Adjusting entries: used at period end to record earned revenues not yet received and incurred expenses not yet paid.  
- Accounting equation effects: earning interest increases assets (receivable) and equity via revenues (credit). Debits increase assets; credits increase revenues.

2. Step-by-step reasoning
- Interest has been earned during the period but cash has not been received.  
- To reflect that the company has a right to receive cash, record an asset called Interest Receivable (increase asset = debit).  
- To recognize that the company has earned the interest, record Investment Income (increase revenue = credit).  
- The adjusting entry must leave the books in balance: debit Interest Receivable and credit Investment Income.

3. Intermediate steps (illustrative amounts)
- Suppose $500 interest earned but not received.  
- Debit Interest Receivable $500 (asset +)  
- Credit Investment Income $500 (revenue +, equity +)  
- Debits = Credits, accounting equation maintained.

4. Why the correct answer is correct
- Debiting Interest Receivable records the asset the company will collect; crediting Investment Income recognizes the earned revenue in the period per accrual accounting. This matches the provided correct entry.

5. Why the other options are incorrect
- Debit Accounts Receivable and credit Unearned Revenue: Unearned Revenue is a liability for cash received before earning revenue — opposite of earned interest.  
- Debit Unearned Revenue and credit Investment Income: Debiting a liability implies reducing a prepayment; interest earned increases revenue and creates a receivable, not reduce a liability.  
- Debit Sales Revenue and credit Accounts Receivable: Sales Revenue is for goods/services sales, not interest; and debiting revenue would decrease it, which is wrong.

6. Conclusion
The appropriate adjusting entry is Debit Interest Receivable and credit Investment Income, which matches the provided correct answer.

Which of the following entries records the adjustment for interest earned on an investment, but not yet collected?Single choice

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