How to Accrue Interest Earned on a Note Receivable?

What adjusting entry is required to accrue the interest earned on a note receivable at December 31?

1) Interest Expense / Interest Payable $375

2) Interest Receivable / Interest Revenue $375

3) Interest Payable / Interest Expense $375

4) Interest Expense / Cash $375

Answer:

The adjusting entry required to accrue the interest earned on a note receivable at December 31 is Interest Expense / Interest Payable $375.

When interest is earned on a note receivable at December 31, an adjusting entry is needed to reflect this in the financial records. In this case, the adjusting entry required is to debit Interest Expense for $375 and credit Interest Payable for $375.

This entry allows the recognition of the interest expense incurred during the period and establishes the liability for the interest owed at the end of the accounting period. By accruing the interest earned on the note receivable, the financial statements will accurately reflect the company's current financial position.

Accruing interest on notes receivable ensures that the company's income is properly recognized and the corresponding liability is recorded. It is essential for maintaining accurate financial records and ensuring compliance with accounting principles.