Question

Pavement Company purchased a truck from Bee Thousand Corp. by issuing a 6-month, 8% note payable for $90,000 on November 1. On December 31, the accrued expense adjusting entry is

A) No entry is required.
B) Interest Expense
7,200 Interest Payable

7,200


C) Interest Expense
3,600 Interest Payable

3,600


D) Interest Expense
1,200 Interest Payable

1,200

Answer 1

The correct journal entry for the accrued interest on a 6-month, 8% note payable for $90,000, for a two-month period ending December 31, is an Interest Expense debit and Interest Payable credit for $1,200.

Step-by-step explanation:

The subject of this question is the calculation of accrued interest for a note payable in accounting. When a company issues a note payable with interest, interest expense accrues over time and must be recorded in the financial statements, even if the interest has not yet been paid. In the given scenario, Pavement Company issued a 6-month, 8% note payable for $90,000 on November 1.

To calculate the accrued interest for the 2-month period ending December 31, use the formula: Accrued Interest = Principal x Rate x Time. The principal is $90,000, the annual interest rate is 8%, and the time period is 2/12 year (November and December).

Accrued Interest = $90,000 x 8% x 2/12 = $1,200

Therefore, the correct journal entry on December 31 to record the accrued interest would be:
Interest Expense 1,200
Interest Payable 1,200

This entry records the interest that has accrued on the note payable by the end of December 31, even though the interest will not be paid until the note matures.