Question

A company issues a $200,000, 8%, 9-month note on September 1. The company uses a December 31 year-end. What is the correct year-end adjusting entry for the company?

A. Interest Expense........ 5,333
Interest Payable............ 5,333
B. Interest Payable........... 5,333
Interest Expense.......... 5,333
C. Interest Expense....... 5,333
Notes Payable............ 5,333
D. Interest Payable.......... 16,000
Cash......... 16,000
E. Interest Expense......... 16,000
Interest Payable.…............ 16,000

Answer 1

The correct year-end adjusting entry to record the accrued interest on a $200,000, 8%, 9-month note is to debit Interest Expense and credit Interest Payable for $5,333.33, corresponding to 4 months of accrued interest.

Step-by-step explanation:

The company issued a $200,000, 8%, 9-month note on September 1 and uses a December 31 year-end. To calculate the correct year-end adjusting entry for interest, we need to calculate how much interest has accumulated by December 31. Since the note was issued on September 1, we are looking at 4 months of interest (September to December inclusive).

The annual interest amount is calculated as $200,000 * 8% = $16,000. For 4 months, the interest is ($16,000 / 12) * 4 = $5,333.33. As this interest has not been paid by the year-end, it must be recorded as an expense and payable.

The correct year-end adjusting entry would be:

• Debit Interest Expense $5,333.33
• Credit Interest Payable $5,333.33

Thus, the correct option is:

A. Interest Expense......... 5,333
Interest Payable............ 5,333