Question

Lemming makes an $18,750, 120-day, 8% cash loan to Notions Co. on November 1. Lemming's end-of-period adjusting entry on December 31 should be: Multiple Choice Debit Interest Revenue $500; credit Notes Receivable $500. Debit Interest Receivable $500; credit Interest Revenue $500. Debit Interest Receivable $250; credit Interest Revenue $250. Debit Notes Receivable $500; credit Interest Revenue $500. Debit Cash for $250; credit Notes Receivable $250.

Answer 1

Answer:

Interest Receivable (Dr.)           $250

            Interest Revenue (Cr.)                $250

Explanation:

Notions Co. has borrowed money from Lemming and will have to pay cost for it which is a source of fund (revenue) for Lemming. According to the Accrual concept of accounting, revenue should be recognized when earned and not when cash is received.  At year end, the interest revenue of two months has been accrued, so it needs to be recognized in the Books of Lemming.

⇒ 18,750 * 8% = 1,500 p.a.

OR Interest Revenue for two months = (1,500/12) * 2 = $250.