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On September 1, Kennedy Company loaned $135,000, at 10% annual interest, to a customer. Interest and principal will be collected when the loan matures one year from the issue date. Assuming adjustments are only made at year-end, what is the adjusting entry for accruing interest that Kennedy would need to make on December 31, the calendar year-end

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Answer:

Dec 31   Interest Receivable        $4500 Dr

                   Interest Revenue            $4500 Cr

Explanation:

The loan is for one year and the interest rate 10% is annual interest rate. Thus the tota interest revenue on loan for one yar will be,

interest revenue = 135000 * 0.1 = 13500

The adjusting entry is made on 31 december i.e. 4 months after the loan was granted to the customer. So, following the accrual basis, the 4 month's interest relates to this yeaar's period and the interest revenue will be recorded on 31 december along with a debit to interest receivable.

The 4 month's interest revenue = 13500 * 4/12 = 4500

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