Question

Uncle Tupelo's Gifts signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $75000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest

Answer 1

Interest expense --------$1,500

Interest payable-------------- $1,500

Step-by-step explanation:

Given the following ;

Amount of note signed = $75,000

Annual interest rate = 12% = 0.12

Date signed = November 1

Calculate interest expense to be made in the adjusting entry by December 31 :

NOTE: No entries have been made previously for the interest expense

Monthly Interest = (Amount × rate) ÷ 12

Monthly interest = ($75,000 × 0.12) ÷ 12

Monthly interest = $9000 ÷ 12 = $750

November 1 to December 31 = 2 months

$750 × 2 = $1500

Interest expense = $1,500