Harper Company lends Hewell Company $39,600 on March 1, accepting a four-month, 8% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared?

The required adjusting entries before the financial statements can be prepared are:

Debit Note receivable                 $39,600

Credit Cash                                  $39,600

(To record note receivable)

Debit Interest receivable                 $264

Credit Interest revenue                   $264

(To record interest receivable on note - March 31)

Explanation:

Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest revenue on the note is calculated as: Principal x Interest Rate x Time

In this case, the total interest revenue is $39,600 x 8%/12 x 4 months = $1,056.

Monthly interest revenue is therefore $1,056 / 4 months = $264.