Question

A company receives interest on a $90,000, 8%, 5-year note receivable each April 1. At December 31, 2020, the following adjusting entry was made to accrue interest receivable:

                  Interest Receivable ...............................................................          5,400

                              Interest Revenue ......................................................                               5,400

Assuming that the company does use reversing entries, what entry should be made on April 1, 2021 when the annual interest payment is received?

		Cash ....................................................................................................1,800                               Interest Revenue ......................................................                               1,800
		Cash   ....................................................................................................5,400 Interest Revenue .........................................................................................5,400
		Cash ............................................................. 7,200 Interest Receivable..................................................5,400   Interest Revenue.....................................................1,800
		Cash   ....................................................................................................7,200   Interest Revenue .........................................................................................7,200

Answer 1

Answer :

Cash	7,200
Interest Revenue		7,200

Explanation:

Since the company uses reversing entries, the reversal entry passed on January 1, 2021 was -

		Debit	Credit
Jan 1 , 2021	Interest Revenue	5,400
	Interest Receivable		5,400

  Cash received on  April 1, 2021 =  $90,000 * 8% = $7,200.

Thus Cash Account is debited by $7,200

Interest Revenue received on April 1, 2021 (January 1, 2021 to March 31, 2021) = ($7,200 / 12 months) * 3 months = $1,800 Credit

Thus Interest Revenue Account on April 1, 2021 should show $1,800 credit balance

But Interest Revenue already debited by $5,400 on January 1, 2021 reversal entry.

Therefore to adjust the difference, the Interest Revenue Account on  April 1, 2021 should should be credited by $7,200.