Journal Entries for Interest Receivable
The following Interest receivable’s journal entry example gives an understanding of the most common type of situations where the Journal Entry of Interest Receivable is accounted for and how one can record the same. As there are many situations where the Journal Entry of Interest Receivable can be passed, it is not possible to provide all the type of examples.
So, some of the most common Journal Entry of Interest Receivable are given below -.
Examples of Interest Receivable Journal Entry
Below are the examples of Interest Receivable Journal Entries.
Example #1
Company X ltd. a deposited sum of $ 500,000 in the bank account on December 01, 2018. The accounting year of the X ltd. ends on December 31, 2018. The company earned the interest of $ 5,000 for the December month on bank deposit but the same was received on January 7th, 2019. Analyze the treatment of the interest received by the company and pass the necessary journal entries.
Solution:
The date when the interest is received: January 7th, 2019
In the present case the company X ltd. earned the interest in one accounting year (ending on December 31, 2018) and received the same in the next accounting year (ending on December 31, 2019). Here, the X ltd will recognize the $ 5,000 interest income in financial statements of the year ending 2018 even though the same was received by the company in next accounting period because it relates to current accounting period i.e., 2018.
Following are the accounting entry for recording interest income receivable in financial statements of the year ending 2018 and the receipt of income in financial statements of the year ending 2019.
Entry to record the interest income receivable
For the year ending December 2018
For the year ending December 2019Entry to record the receipt of interest income
Example #2
Bank gives the loan on September 30, 2018, to one of its employee amounting $200,000 on the condition that the interest rate of 12% will be charged. It was promised by the employee to return the principal amount along with the interest portion after 3 months i.e., at the end of the accounting year 2018. However, at the end of the year principal and interest were not paid by the employee. On January 01, 2019 check was sent by the employee for the payment of the interest portion of the three months.
Analyze the treatment of the interest received by the company and pass the necessary journal entries in the books of the bank.
Solution:
In the present case, the employee was not able to pay the loan principal amount as well as the interest portion on the due date. The interest portion got accrued in accounting year ending in 2018 but not received. So the bank will recognize its income of interest in the accounting year ending in 2018 and record the receipt of the same in the accounting year in which the income is actually received.
Calculation of Interest income to be recognized in accounting year ending on 2018.
= Loan amount * interest rate * (number of due months /12)
= $ 200,000 * 12% * (3/12) = $ 6,000
Entry to record the disbursement of loan and interest income receivable
For the year ending December 2018
For the year ending December 2019 Entry to record the receipt of interest income.
Example #3
On November 1, 2018, Company Y ltd purchased 1-year bond for $ 500,000 that pays the interest at the rate of 12% interest. Principal and interest amount due is to be collected by the company at the end of the bond’s term. Pass the necessary journal entries in the books of the Company.
Solution:
At the accounting period ending in 2018, on December 31, 2018 interest has already been accrued for the one month period. The same is to be recognized by the company in its books of accounts even if interest has not been received yet.
Calculation of Interest income to be recognized in accounting year ending on 2018
= Loan amount * interest rate * (number of due months /12)
= $ 500,000 * 12% * (1/12)
= $ 5,000
The journal entry for the year ending December 2018 would be:
The above adjusting journal entry will be required at the end of every period in order to prepare and present the correct monthly financial statement of the company.
Conclusion
Interest receivable is an amount which has been earned by the person but the same has not been received yet. Once the interest income is accrued (becomes receivable), the journal entry should be passed to record it on the date when it became due and the date when the payment against the same is received, then on that date receipt entry should be passed in the books of accounts.
The adjusting journal entry should be passed at the end of every period in order to prepare and present the correct monthly financial statement of the company to the stakeholders.
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