On June 1, 2014, Siebens Enterprises loaned $20,000 to Tyler Company for one year at 8 percent interest. Under the terms of the promissory note, Tyler will repay the principal and pay one year's interest on May 31, 2015.

Related to this note receivable, what amount of interest income would Siebens report on its 2014 income statement?

Siebens will report $933.33 of Interest Income relating to this note on its 2014 Income Statement

Explanation:

Assuming that the year end for the Siebens is on 31 December, there will be an adjusting entry passed on this day under the accrual principle to caclulate and record the interest income on notes Receivable that relates to this year. The interest income for this year can be calculated as:

Interest Income = 20000 * 0.08 * 7/12 = $933.33

The journal entry to record this will be

31 December 2014 Interest receivable     $933.33

                                      Interest Income        $933.33

$933.33

Explanation:

Since the loan was made on June 1, Siebens Enterprises must record accrued interest equivalent to 7 months of interest:

accrued interest = principal x interest rate x months/12 = $20,000 x 8% x 7/12 = $933.33

The journal entry used to record accrued interest should be:

Dr Interest receivable 933.33

    Cr Accrued interest revenue 933.33

Accrual accounting principle states that revenues and expenses must be recognized during the accounting period that they occur, and in this case, the interest was earned during 2014.

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