Question

on october 1, 2023, the early bank lends money to a customer on a six month note. the bank accrues interest on the note at december 31, 2023. the banks journal entry on december 31, 2023 would include a: a. debit to cash and a credit to interest payable for three months of interest. b. debit to cash and a credit to interest revenue for three months of interest. c. debit to interest receivable and a credit to interest revenue for three months of interest. d. debit to interest revenue and a credit to interest receivable for three months of interest.

Explanation:

1. Analyze the transaction: The bank lent money on a 6 - month note on Oct 1, 2023. By Dec 31, 2023, 3 months of interest have accrued (Oct - Dec).
2. For accrued interest (revenue not yet received), the bank should recognize the interest it has earned but not yet received. So, we debit Interest Receivable (an asset account for the interest owed to the bank) and credit Interest Revenue (to recognize the revenue earned from the interest for the 3 - month period).
3. Analyze other options:

• Option A: The bank is earning interest, not paying it. So Interest Payable is incorrect. Also, Cash is not debited here as the interest is not received yet.
• Option B: Cash is not debited because the interest is accrued (not received in cash yet). We use Interest Receivable for accrued interest revenue.
• Option D: The debit and credit accounts are reversed. We should debit Interest Receivable and credit Interest Revenue, not the other way around.

Answer:

C. debit to Interest Receivable and a credit to Interest Revenue for three months of interest.