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Chapter 8: 21RQ (page 465)

Why must companies record accrued interest revenue at the end of the accounting period?

Short Answer

Expert verified

Accrued income is reported to fulfill the requirements of the revenue recognition principle of accounting.

Step by step solution

01

Definition of Accrued Income

Accrued income can be defined as the income earned by the business entity over time, but the payment that is not received yet is known as accrued income. Such income is reported while preparing adjusting entries.

02

Reason for recording

The business entity earns interest over time rather than at the time of receipt of cash. Therefore, it is required to report the interest earned at the end of the period while preparing to adjust entries. Such a process is carried out to comply with the revenue recognition principle.

Journal entry for recording the accrued interest revenue:

Date

Account and explanation

Debit ($)

Credit ($)

DD/MM/YYYY

Interest receivable

xx

Interest revenue

xx

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Most popular questions from this chapter

What occurs when a business factors its receivables?

When is bad debts expense recorded when using the allowance method?

Unique Media Sign Incorporated sells on account. Recently, Unique reported the following figures:

2018

2017

Net Credit Sales

\( 594,920

\)602,000

Net Receivables at end of year

38,500

47,100

Requirements

1. Compute Unique鈥檚 days鈥� sales in receivables for 2018. (Round to the nearest day.)

2. Suppose Unique鈥檚 normal credit terms for a sale on account are 2/10, net 30. How well does Unique鈥檚 collection period compare to the company鈥檚 credit terms? Is this good or bad for Unique?

Journalizing note receivable transactions

The following selected transactions occurred during 2018 and 2019 for Baltic Importers. The company ends its accounting year on September 30.

2018

Jul. 1

Loaned \(16,000 cash to Bud Shyne on a one-year, 8% note.

Sep. 6

Sold goods to Lawn Pro, receiving a 90-day, 6% note for \)11,000. Ignore Cost of Goods Sold.

30

Made a single entry to accrue interest revenue on both notes.

?

Collected the maturity value of the Lawn Pro note.

2019

Jul. 1

Collected the maturity value of the Shyne note.

Journalize all required entries. Make sure to determine the missing maturity date. Round to the nearest dollar

At September 30, 2018, the accounts of Green Terrace Medical Center (GTMC)

include the following:

Accounts Receivable \( 145,000

Allowance for Bad Debts (credit balance) 3,500

During the last quarter of 2018, GTMC completed the following selected transactions:

鈥� Sales on account, \)450,000. Ignore Cost of Goods Sold.

鈥� Collections on account, \(427,100

鈥� Wrote off accounts receivable as uncollectible: Regan, Co., \)1,400; Owen Reis, \(800;

and Patterson, Inc., \)700

鈥� Recorded bad debts expense based on the aging of accounts receivable, as follows:

Age of Accounts

1鈥�30 Days 31鈥�60

Days

61鈥�90

Days

Over 90

Days

Accounts Receivable \( 104,000 \) 39,000 \( 14,000 \) 8,000

Estimated percent uncollectible 0.3% 3% 30% 35%

Requirements

1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts.

Journalize the transactions (omit explanations) and post to the two accounts.

2. Show how Green Terrace Medical Center should report net accounts receivable on

its December 31, 2018, balance sheet.
See all solutions

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