Question

On January​ 1, Year​ 1, Smart Touch Learning borrowed $ 11000 on a​ 3-year, 12​% note payable. At December​ 31, Year 1 the business should record

Answer 1

At December 31, Year 1, Smart Touch Learning must record an interest expense and an accrued liability for interest on the $11000 note payable at a 12% annual rate, equaling $1320 for one year.

Step-by-step explanation:

On January​ 1, Year​ 1, Smart Touch Learning borrowed $11000 on a​ 3-year, 12​% note payable. At December​ 31, Year 1, the business should record an interest expense and a corresponding liability for the interest accrued for that year.

The interest for one year at a 12% annual rate would be $1,320 ($11,000 x 12%).

The journal entry to record this would be a debit to Interest Expense for $1,320 and a credit to Interest Payable for $1,320. This reflects the cost of borrowing the funds for the year and is necessary for the accrual basis of accounting.