Question

A company is in its first month of operations. On January 1, the company borrows $10,000 from the bank. The bank charges annual interest of 12% on the borrowed amount. Interest is due at the end of the year. What adjusting entry would be made at the end of January?

Answer 1

The Journal entry is as follows:

Interest expense A/c Dr. $100

To Interest payable A/c $100

(To record the interest expense for the first month)

Workings:

Amount borrowed = $10,000

Annual interest rate = 12%

Interest is due at the end of the year

Time period = 1 month

Therefore,

Interest expense = $10,000 × 0.12 × (1 ÷ 12)

= $100