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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:_______

a. Debit Cash for $250 credit Notes Receivable $250.
b. Debit Interest Revenue $500; credit Notes Receivable $500.
c. Debit Interest Receivable $250, credit Interest Revenue $250.
d. Debit interest Receivable $500, credit Interest Revenue $500.
e. Debit Notes Receivable $500, credit Interest Revenue $500

Respuesta :

Answer:

The correct option is c. Debit Interest Receivable $250, credit Interest Revenue $250.

Explanation:

The interest revenue from this loan can be calculated as follows:

Interest revenue = Loan amount * (Number of days from November 1 to December 31 / Number of days in a year) * Interest rate .............. (1)

Where;

Interest revenue = ?

Loan amount = $18,750

Number of days from November 1 to December 31 = 60

Number of days in a year = 350

Interest rate = 8%

Substituting the values into equation (1), we have:

Interest revenue = $18,750 * (60 / 360) * 8%

Interest revenue = 250

Since it is a 120-day loan which implies that repayment is expected to be made after December 31, i.e. on 120th day, Lemming's end-of-period adjusting entry on December 31 should be Debit Interest Receivable for $250; and Credit Interest Revenue $250.

Therefore, the correct option is c. Debit Interest Receivable $250, credit Interest Revenue $250.