Timothy Company sold merchandise to a customer on October 17 of 2004. They accepted a $4,80
0, 90 day, 10% note as payment. If Timothy Company's accounting period ends on December 31, 2004 [Oct 17 to Dec 31 = 75 days], Timothy Company's journal entry on January 15 ( when the note plus interest is received ) will include:
A) Credit to Interest Revenue for $120
B) Credit to Interest Revenue for $480
C) Credit to Interest Receivable for $20
D) Credit to Interest Receivable for $100
E) Debit to Cash for $5,280

First you have to calculate the amount of interest for the period Oct 17 to Dec 31. This will be the amount of Interest Receivable.

Next you will have to calculate the amount of interest for the period 1Jan to Jan 15. This is the amount of interest revenue for the current accounting period.

So to calculate interest, the formula is: Interest = Principal * Rate * Time. So $4,800 * 10% * 75/360 equals your interest receivable amount.

Next $4,800 * 10% * 15/360 equals your interest revenue amount.

Now add the two interest amounts together plus the $4,800 principal amount to get your total payment received.

Now to get your answer you have to know the journal entry for the receipt of the payment. So your journal entry will be:
Debit Cash for the total amount received
Credit Interest Receivable for the amount of interest receivable amount calculated above
Credit Interest Revenue for the amount of interest revenue calculated above.

Now you should be able to figure out what the answer is.