Question

On November 19, Nicholson Company receives a $21,000, 60-day, 10% note from a customer as payment on account. What adjusting entry should be made on the December 31 year-end? (Use 360 days a year.)

Multiple Choice

Debit Notes Receivable $245; credit Interest Receivable $245.

Debit Interest Receivable $350; credit Interest Revenue $350.

Debit Interest Receivable $245; credit Interest Revenue $245.

Debit Interest Revenue $350; credit Interest Receivable $350.

Debit Notes Receivable $105; credit Interest Revenue $105.

Answer 1

• No of days the bill stayed outstanding since November 19 = 11 days in November + 31 Days in December = 42 days
• Hence, interest revenue should be recorded through an adjusting entry for those 42 days.
• Interest revenue for 42 days = $ 21,000 x 10% x (42 days/360 days)
  = 21000 x 10% x 42/360
  = $ 245
• Hence, Interest receivables will be debited and Interest revenue will be credited by $ 245
• Correct Answer = Option #3:
  Debit Interest Receivable $245; credit Interest Revenue $245