Question

Ponson Company borrowed $20,000 from Baltimore Bank on May 1, 2017, and gave a 120-day, 12% note bearing interest on the face amount. Ponson's adjusting entry on June 30, 2017, the end of their fiscal year, would include a debit to Interest Expense of _______

Answer 1

Debit to Interest expense of = $1200

Step-by-step explanation:

Adjusting entries are passed at the year end/reporting date in order to comply to the accruals concept of accounting which requires entities to record revenue and expense in the period they are earned and incurred. Since the note bearing interest is for a 120-day period (i.e 4 months) and Ponson company's closing date is June 30 2017, therefore we have to pass adjusting entry with the amount of interest expense for 2 months (i.e May & june) as follows:

Interest expense for 120-days= $20000×12%

Interest expense for 120-days= $2400

Now we calculate daily interest expense as follows;

Interest expense per day= $2400÷120

Interest expense per day= $20

Interest expense for the month of May & June= $20×60

Interest expense for the month of May & June= $1200