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21 March, 20:25

Harper Company lends Hewell Company $39,600 on March 1, accepting a four-month, 8% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared?

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  1. 21 March, 20:37
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    The required adjusting entries before the financial statements can be prepared are:

    Debit Note receivable $39,600

    Credit Cash $39,600

    (To record note receivable)

    Debit Interest receivable $264

    Credit Interest revenue $264

    (To record interest receivable on note - March 31)

    Explanation:

    Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

    Interest revenue on the note is calculated as: Principal x Interest Rate x Time

    In this case, the total interest revenue is $39,600 x 8%/12 x 4 months = $1,056.

    Monthly interest revenue is therefore $1,056 / 4 months = $264.
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