Question

A company entered into a one-year 10% interest rate loan agreement on October 1, 2020. The amount of the loan is $120,000. The principal and the interest are to be repaid at the end of the one-year period.

What is the amount of the adjusting journal entry on December 31, 2020?

a) $12,000

b) $10,000

c) $3,000

d) $0

Answer 1

The adjusting journal entry on December 31, 2020, for a one-year 10% interest rate loan agreement would be $3,000.

Step-by-step explanation:

The adjusting journal entry on December 31, 2020, for a one-year 10% interest rate loan agreement would involve recording the accrued interest expense based on the number of months that have passed since the loan was taken out. In this case, there are three months that have passed (October, November, and December).

To calculate the accrued interest expense, we need to multiply the loan amount ($120,000) by the interest rate (10%) and divide it by 12 to get the monthly interest expense. Then, we multiply that amount by the number of months passed (3) since the loan was taken out.

The formula to calculate the accrued interest expense is:

Accrued Interest Expense = (Loan Amount * Interest Rate / 12) * Number of Months

Using this formula, the accrued interest expense would be:

Accrued Interest Expense = ($120,000 * 10% / 12) * 3 = $3,000

Therefore, the correct answer is c) $3,000.