Question

Question 4 of 5 -/1 View Policies Current Attempt in Progress Pharoah Corporation loaned $550000 to another corporation on December 1, 2020 and received a 3-manth, 9% interest-bearing note with a face value of $550000. What adjusting entry should Pharoah make on December 31, 2020? Debit Cash and credit Interest Receivable, $12375. O Debit Casi and credit Interest Revenue, $4125. Debit Interest Receivable and credit Interest Revenue, $12375. Debit Inarest Receivable and credit Interest Revenue $4125 Save for Later Attempts: 0 of 1 used Submit Answer

Answer 1

Answer (D) Debit Interest Receivable and Credit Interest Revenue $4125

Explanation:

Interest on 3 month, 9% interest bearing note on a face value of $550,000 would be

= $550,000 * 9% * 3/12

=$12,375

As it is 3 month bond, the entire interest and principal amount would be received at the end of 3 months.

However since the year end is on Dec 31, 2020, an adjusting entry has to be made.

Interest from Dec 1 to Dec 31 (i.e 1 month) would be $12,375 * 1/3 = $4,125

As cash is not yet received, option a and b is incorrect.

Therefore, the adjusting entry would be

Debit Interest Receivable $4,125 and Credit Interest Income $4,125.

I hope I've explained to the point. Please feel free to ask any queries and do give a thumbsup if the solution was satisfactory. Thankyou.