Question

On November 1, 2018 sky mountain Co. borrowed 200,000 cash on a 1 year, 6% note payable that requires sky mountain to pay both principal and interest on October 31st 2019. Given no prior adjusting entries have been recorded, the adjusting journal entry on December 31, 2018, sky mountains year-end, would include a

A. Credit to cash of 2000
B. Debit to interest expense of 12,000
C. credit to interest payable of 2000
D. credit to note payable of 2,000

Answer 1

The adjusting journal entry on December 31, 2018, for Sky Mountain Co. would include a credit to interest expense of $12,000 (B).

Step-by-step explanation:

The adjusting journal entry on December 31, 2018, for Sky Mountain Co. would include a credit to interest expense of $12,000 (B). The reason for this is because when a company borrows money through a note payable, they are required to pay both the principal and interest at the end of the loan term. In this case, the loan term is one year, and the interest rate is 6%. Therefore, the interest expense can be calculated as $200,000 * 6% = $12,000. By recording an adjusting entry to recognize the interest expense, the company is properly reflecting the cost of borrowing the money.

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