[plmxo]

Young Company lends Dobson industries $30,000 on August 1, 2010, accepting a 9-month, 12% interest note. If young prepares it's financial statements as of December 31, 2001, what adjusting entry must it make?

a. Debit Interest Receivable 1,500
Credit Interest Revenue 1,500
b. Debit Accounts Receivable 1,500
Credit Interest Receviable 1,500
c. Debit Cash 1,500
Credit Interest Revenue 1,500
d. Debit Notes Receivable 1,500
Credit Interest Revenue 1,500

[justcurious55]

We do not do homework on this site. If you show us that you have at least attempted it, we will help you.

[plmxo]

Well the problem is I'm not taught. And since I can't figure it out by simply reading a book that doesn't have examples, I guess I'll just fail.

Thanks.

[justcurious55]

Well with that sort of attitude, yeah, I guess you will just fail.

I don't know the answer. But I'll bet we can figure this out. Does the book have definitions? All of the numbers in each answer are the same. So it must be 1,500 something. You just have to figure out if it's debit interest receivable, debit accounts receivable, etc. so let's figure out what each of those terms means. You get the definitions and post them here. And we'll work on figuring it out from there.

[plmxo]

Sorry about the attitude. I'm just ungodly frustrated with the quality of the education I'm receiving in college. My accounting professor has cancelled twelve classes and the semesters only ten weeks long, so we've only got four classes left and we've only had four classes up to this point. (It's a Tuesday-Thursday class.)

Interest receivable - payment received in the form of interest

Interest revenue - Interest earned on an investment

Accounts Receivable - money owed to a company usually resulting from sales transactions

Notes receivable - written promises (notes) that are to be paid at a later date.


They're the definitions I've been "taught." (Read out of the book and then modified by my professor.)

[justcurious55]

I totally understand the frustration. But you still don't get to take it out on me. That's what ratemyprofessor.com is for...

OK. So let's look at this and see if we can figure it out together.

Interest receivable - payment received in the form of interest

Interest revenue - Interest earned on an investment

Accounts Receivable - money owed to a company usually resulting from sales transactions

Notes receivable - written promises (notes) that are to be paid at a later date.

Now remember, I'm not an accountant and I haven't taken any accounting courses. So don't take my word for this. We're just trying to see if we can make sense of this until (hopefully) one of our accounting experts comes along.

I would think we could rule out account receivable because this is a loan. There's nothing about sales transactions.

OK, now you have to do some more of the work here. What other answers can we eliminate?

[morgaine300]

Interest receivable - payment received in the form of interest

Putting something into a receivable means a payment was NOT received, so that is totally incorrect. A receivable (of any kind) represents something that is owed to you, so by definition means you have NOT received payment yet.

Putting words in front of it just classifies it more precisely. We call it "interest" receivable because what is due is derived from interest earned.

Interest revenue - Interest earned on an investment

I don't like the usage of "investment" in that. Allowing someone more time to pay isn't really an investment. But yes, it represents the interest that is earned, and it is earned with the passage of time. (Received or not.)

Accounts Receivable - money owed to a company usually resulting from sales transactions

Yes, by definition, the receivable represents what is owed to you and not been received yet. (Notice how this definition and the other receivable kind of contradict themselves?) It generally results from sales or services, because it's from our normal daily business. Things like interest get separated out.

Notes receivable - written promises (notes) that are to be paid at a later date.

Given that you're doing this from the receivable end, I'd prefer the word "received" as opposed to "paid." It's also important to note that it's only the face value of the note which goes into this account.

OK, now what do you think is the correct entry? If you still don't know, give your thoughts about it.