On January 1, 2016, Tessa loaned $12,000 to another company on a three-year, 4% note. No interest was accrued in 2016. Cash will not be received for the interest until the end of the three-year period. The error was discovered before adjusting and closing entries were posted on December 31, 2017. Ignoring income taxes, what should be the correct journal entry on December 31

The journal entry is as follows:

On December 31

Interest Receivable ($12,000 × 4% × 2 years)$960  

        To Interest Revenue ($12,000 × 4% × 1 year)  $480

        To Retained Earnings ($12,000 × 4% × 1 years  $480

(Being the correct journal entry is recorded)

Here the interest receivable should be debited as it increased the assets and credited the interest revenue & the retained earnings as it increased the revenue and the stockholder equity

Therefore we can conclude that the above journal entry should be recorded.

Learn more about the journal entry here:

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