Turner Cabinets Company manufactures storage cabinets used in industry. It sells its cabinets to some customers on credit with generous terms specifying payment six months after purchase and an interest rate based on current bank rates. Because the interest on the loans accrues a little every day but is not paid until the note’s due date, an adjusting entry must be made at the end of each accounting period to debit Interest Receivable and credit Interest Income for the amount of the interest accrued but not received to date. The company prepares financial statements every month. Keeping track of what has been accrued in the past is time-consuming because the notes carry different dates and interest rates.
Form in-class groups to determine what the accountant can do to simplify the process of making the adjusting entry for accrued interest each month. Compare the groups’ solutions in a class discussion.