Question

A company borrowed $100,000 on December 1 by signing a six-month note that specifies interest at an annual percentage rate (APR) of 12%. No interest or principal payment is due until the note matures on May 31. The company prepares financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that should be entered in the company's records.

What date should be used to record the December adjusting entry?

Answer 1

The December adjusting entry should be recorded on December 31 to reflect the interest expense accrued during the month of December.

Step-by-step explanation:

The adjusting entry for the interest expense should be recorded at the end of each month to recognize the portion of interest that has accrued during that month. In this case, the company borrowed $100,000 on December 1 at an annual percentage rate (APR) of 12%.

Since the note specifies that no interest payment is due until the note matures on May 31, the December adjusting entry should be recorded on December 31 to reflect the interest expense accrued during the month of December.