Question

Chemical Enterprises issues a note in the amount of $156,000 to a customer on January 1, 2018. Terms of the note show a maturity date of 36 months, and an annual interest rate of 8%. What is the accumulated interest entry if 9 months have passed since note establishment?

a) Debit Interest Expense $3,120; Credit Notes Payable $3,120
b) Debit Interest Receivable $31,200; Credit Interest Revenue $31,200
c) Debit Interest Expense $9,360; Credit Interest Payable $9,360
d) Debit Interest Receivable $3,920; Credit Interest Revenue $3,920

Answer 1

The correct calculation for the accumulated interest after 9 months on a $156,000 note at an 8% annual interest rate involves multiplying the principal by the rate and the time in years. The amount of interest accrued is $9,360, so the correct journal entry is a debit to Interest Expense and a credit to Interest Payable for $9,360.

Step-by-step explanation:

The question involves calculating the accumulated interest for a note after 9 months. The formula to use for calculating simple interest is Interest = Principal × Rate × Time, where 'Principal' is the amount of the note, 'Rate' is the annual interest rate, and 'Time' is the period of time for which interest is calculated.

The principal here is $156,000, the rate is 8% annually (or 0.08), and the time is 9 months. Since we're dealing with an annual rate, we first need to convert the time to years by dividing by 12 (9 months / 12 months per year = 0.75 years). The interest can then be calculated as:

Interest = $156,000 × 0.08 × 0.75

By multiplying these together, we get:

Interest = $9,360

Therefore, the correct journal entry for the accumulated interest after 9 months would be:

Debit Interest Expense $9,360; Credit Interest Payable $9,360.

This corresponds with option c) in the question.