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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

On August 1, Taylor Company lent $80,000 to L. King on a 90-day, 5% note.

12. Journalize for Taylor Company the lending of the money on August 1.

13. Journalize the collection of the principal and interest at maturity. Specify the date. Round interest to the nearest dollar.

Question: Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):

Accounts Payable

\( 328,000

Accounts Receivable, net:

Cash

\) 573,720

April 30, 2018

\( 11,000

Merchandise Inventory:

April 30, 2017

\) 165,000

April 30, 2018

\( 250,000

Cost of Goods Sold

\) 1,200,000

April 30, 2017

\( 210,000

Short-term Investments

\) 148,000

Net Credit Sales Revenue

\( 3,212,000

Other Current Assets

\) 100,000

Long-term Assets

\( 350,000

Other Current Liabilities

\) 188,000

Long-term Liabilities

$ 130,000

Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days’ sales in receivables to a whole number.)

On June 1, 2018, Best Performance Cell Phones sold \(21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only \)5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, on March 5, 2019, Best Performance received Anthony’s check for $16,000 with a note apologizing for the late payment.

Requirements

1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.

2. What are some limitations that Best Performance will encounter when using the direct write-off method?

When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?

Recording credit sales and collections

Record the following transactions for Summer Consulting. Explanations are not required.

Apr. 15

Provided consulting services to Bob Jones and billed the customer \(1,500.

18

Provided consulting services to Samantha Cruise and billed the customer \)865.

25

Received \(750 cash from Jones.

28

Provided consulting services to Regan Taylor and billed the customer \)625.

28

Received \(865 cash from Cruise.

30

Received \)1,375 cash, \(750 from Jones and \)625 from Taylor
See all solutions

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