Question

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. Which of the following journal entries would be required to recognize accrued interest on December 31, Year 1?

a. $360, and $0.
b. $0 and $360
c. $270 and $90
d. $270 and $0

Answer 1

The correct journal entry for accrued interest on a $6,000 loan at a 6% interest rate after nine months is a debit to Interest Expense for $270 and a credit to Interest Payable for $270.

Step-by-step explanation:

The journal entry required to recognize accrued interest on December 31, Year 1, for a loan of $6,000 at a 6% interest rate would include calculating the interest expense for the nine months from April 1 to December 31. The interest amount is calculated using the formula: Interest = Principal x Rate x Time. Therefore, the interest for nine months would be: $6,000 x 6% x 9/12. This calculates to an interest expense of $270.

The correct journal entry would be:

1. Debit Interest Expense for $270
2. Credit Interest Payable for $270

The entry increases the interest expense on the income statement and recognizes a liability for interest payable on the balance sheet. No cash has yet changed hands; the entry merely reflects the accrued interest up to December 31.