Question

A gift shop, located in a hotel, signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $60,000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?

Answer 1

The adjusting entry to be made on December 31 for the interest expense accrued to that date is a debit to Interest Expense for $1,200 and a credit to Accrued Interest Payable for $1,200.

Step-by-step explanation:

The adjusting entry to be made on December 31 for the interest expense accrued to that date can be calculated using the following formula:

Interest Expense = Principal Amount x Interest Rate x Time

In this case, the principal amount is $60,000, the interest rate is 12%, and the time is the number of months from November 1 to December 31, which is 2 months (since November and December). Plug in these values into the formula to calculate the interest expense:

Interest Expense = $60,000 x 0.12 x 2/12 = $1,200

Therefore, the adjusting entry to be made on December 31 for the interest expense accrued to that date is a debit to Interest Expense for $1,200 and a credit to Accrued Interest Payable for $1,200.