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18 June, 06:09

On December 1, 2021, Davenport Company sold merchandise to a customer for $30,000. In payment for the merchandise, the customer signed a 9% note requiring the payment of interest and principal on March 1, 2022. How much interest revenue will the company recognize during 2021 and 2022?

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  1. 18 June, 09:50
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    The interest revenue of $225 will be recognized for the year 2021 and the interest revenue for 2022 will be $450.

    Explanation:

    The accrual principle in accounting requires the businesses to match their revenues to the expenses of that period. This requires passing adjusting entries at the end of the year. Assuming that year end adjusting entry for 2021 is passed on 31 december, the interest revenue that relates to the period from 1 december 2021 to 31 december 2021, i. e. one month, will be recorded as interest revenue and interest receivable account will be debited as interest is not received yet.

    Interest revenue for 2021 = 30000 * 0.09 * 1/12 = 225

    The interest revenue for 2022 will be the interest charged on this note for two months, i. e. January and February.

    The interest revenue for 2022 will be = 30000 * 0.09 * 2/12 = 450
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