Question

On December 1, Milton Company borrowed $480,000, at 8% annual interest, from the Tennessee National Bank. Interest is paid when the loan matures one year from the issue date. What is the adjusting entry for accruing interest that Milton would need to make on December 31, the calendar year-end?

A. debit Interest Expense, $3,200; credit Interest Payable, $3,200.
B. debit Interest Expense, $6,400; credit Interest Payable, $6,400.
C. debit Interest Expense, $38,400; credit Interest Payable, $38,400.
D. debit Interest Expense, $3,200; credit Cash, $3,200.
E. debit Interest Payable, $3,200; credit Interest Expense, $3,200.

Answer 1

Option (a) is correct.

Step-by-step explanation:

Given that,

Amount borrowed on December 1 = $480,000

Interest rate = 8%

Interest is paid when the loan matures one year from the issue date.

Now, the amount of annual interest expense is calculated as follows:

= Principal amount × Interest rate × Time period

= $480,000 × 8%

= $38,400

The accrued interest is calculated only for the one month that is from December 1 to December 31.

Amount of accrued interest expense for the one month:

= Annual interest expense × Time period

= $38,400 × (1/12)

= $3,200

Therefore, the journal entry will be:

Interest expense A.c Dr. $3,200

To interest payable $3,200

(To record the accrued interest)