Which of the following transactions is recorded with a debit to Cash and a credit to Interest Receivable?

• A. Borrowing cash from a bank
• B. Payment of interest expense
• C. Accrual of interest earned but not yet received
• D. Collection of previously accrued interest income

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of the transaction. The problem states that the transaction involves a debit to Cash and a credit to Interest Receivable. This indicates that cash is being received, and the Interest Receivable account is being reduced.
2. Step 2: Recall the purpose of the Interest Receivable account. Interest Receivable is an asset account that represents interest income earned but not yet collected in cash. When the interest is eventually collected, the account is reduced.
3. Step 3: Analyze the options provided. Borrowing cash from a bank would involve a debit to Cash and a credit to a liability account, not Interest Receivable. Payment of interest expense would involve a credit to Cash and a debit to Interest Expense, not Interest Receivable. Accrual of interest earned but not yet received would involve a debit to Interest Receivable and a credit to Interest Income, not Cash.
4. Step 4: Focus on the correct answer: Collection of previously accrued interest income. This transaction matches the description because it involves receiving cash (debit to Cash) and reducing the Interest Receivable account (credit to Interest Receivable).
5. Step 5: Summarize the journal entry for the correct transaction. The journal entry would be: Debit Cash (to record the receipt of cash) and Credit Interest Receivable (to reduce the receivable as the interest has now been collected).