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Starr Corporation loaned $600,000 to another corporation on December 1, 2020 and received a 3-month, 8% interest-bearing note with a face value of $600,000. What adjusting entry should Starr make on December 31, 2020?

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Answer:

See explanation section

Explanation:

December 31   Interest receivable      Debit    $4,000  

                        Interest revenue          Credit   $4,000

Calculation: $600,000 × 8% × (1 ÷ 12) = $48,000 × (1 ÷ 12) = $4,000. Therefore, the monthly interest revenue = $4,000.

As Starr corporation provided a loan on December 1, they received interest revenue for 3 months. However, as the fiscal year closes on December 31, the interest revenue is owed for one month only.

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