On May 1, 2021, Townsley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjusting entry, if any, should Prime Bank record on December 31, 2021? a. Debit Interest Receivable and credit Interest Revenue for $5,000. b. Debit Interest Receivable and credit Interest Revenue for $10,000. c. Debit Interest Receivable and credit Interest Revenue for $15,000. d. No adjusting entry is necessary.

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Business

Rayan Moore

18 July, 15:08

On May 1, 2021, Townsley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjusting entry, if any, should Prime Bank record on December 31, 2021? a. Debit Interest Receivable and credit Interest Revenue for $5,000. b. Debit Interest Receivable and credit Interest Revenue for $10,000. c. Debit Interest Receivable and credit Interest Revenue for $15,000. d. No adjusting entry is necessary.

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Tiger · Answer 1

b. Debit Interest Receivable and credit Interest Revenue for $10,000

Explanation:

The adjusting entry is shown below:

Interest receivable A/c Dr $1,260

To Interest revenue A/c $1,260

(Being accrued interest is recorded)

The computation of accrued interest is shown below:

= Principal * rate of interest * number of months : (total number of months in a year)

= $250,000 * 6% * (8 months : 12 months)

= $10,000

The 8 month is calculated from May 1 to December 31. And we assume the books are closed on December 31