When an investor\'s accounting period ends on a date that does not coincide with

Question

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must:

a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period.

c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.

d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

Explanation / Answer

a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

Think of the requirements of the accrual basis of accounting: revenues are to be recognized when they are earned and expenses are to be recognized (recorded and reported) when they are incurred. Interest is earned by the passage of time and is usually collected after the time period for which it pertains. Thus, to comply with the revenue recognition principle, an adjusting entry is necessary to record the accrued revenue (revenue earned but not yet received).

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