Question

Brown Company has a 90-day, 15% note payable for $8,000 dated December 12 in which interest has accrued. As of December 31 of the current year, what is the appropriate adjusting entry to record the accrued interest?

Answer 1

To record accrued interest for Brown Company's note payable as of December 31, calculate interest for 19 days at 15% on the $8,000 principal, resulting in $62.19. Debit Interest Expense and credit Interest Payable for this amount.

Step-by-step explanation:

The student's question pertains to recording accrued interest on a note payable for Brown Company. To calculate accrued interest for financial statements accurate as of December 31, we consider the interest rate of 15% and the principal amount of $8,000. However, since the note's duration is 90 days and we are only concerned with the portion of interest that has accrued by December 31, we calculate interest for 19 days (December 12 to December 31).

The formula to calculate the interest for a period is: Interest = Principal × Annual Interest Rate × (Number of Days / 365).

So, the calculation will be Interest = $8,000 × 15% × (19/365) = $62.19 (rounded to two decimal places).

The appropriate adjusting entry on December 31 would be a debit to Interest Expense and a credit to Interest Payable:

• Debit Interest Expense: $62.19
• Credit Interest Payable: $62.19