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10 January, 15:23

Starr Corporation loaned $600,000 to another corporation on December 1, 2020 and received a 3-month, 8% interest-bearing note with a face value of $600,000. What adjusting entry should Starr make on December 31, 2020?

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  1. 10 January, 15:46
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    See explanation section

    Explanation:

    December 31 Interest receivable Debit $4,000

    Interest revenue Credit $4,000

    Calculation: $600,000 * 8% * (1 : 12) = $48,000 * (1 : 12) = $4,000. Therefore, the monthly interest revenue = $4,000.

    As Starr corporation provided a loan on December 1, they received interest revenue for 3 months. However, as the fiscal year closes on December 31, the interest revenue is owed for one month only.
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