Final answer:
An adjusting entry for interest owed involves reporting interest expense on the income statement and listing interest payable as a current liability on the balance sheet. Option A is the correct answer.
Step-by-step explanation:
When an adjusting entry is made for interest owed, it reflects the accrual of interest expense that has been incurred but not yet paid. The income statement will report interest expense to show the costs of borrowing for the period. Concurrently, on the balance sheet, interest payable will be reported as a current liability. This liability represents the amount of interest that is owed but not yet paid as of the date of the balance sheet.
If a company has a notes payable that incurs interest, but the interest payment is not due until the next period, the company must still recognize the interest expense incurred during the current period. This practice adheres to the accrual basis of accounting, which states that expenses should be recognized in the period in which they are incurred, not necessarily when they are paid.
To document this, an adjusting journal entry is made to debit the interest expense account (increasing it) and credit the interest payable account (increasing it as well). As a result, the income statement reflects a true and fair view of all expenses related to the period, including those not yet paid in cash, and the balance sheet accurately depicts the company's current obligations.
In conclusion, the correct answer to the student's question is: A. income statement; interest expense and F. balance sheet; interest payable.