Question

On November 1, 2021, New Morning Bakery signed a $195,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. New Morning Bakery should record which of the following adjusting entries at December 31, 2021?

A. Debit Interest Expense and credit interest Payable. $1950.
B. Debit Interest Expense and credit Interest Payable, $5850.
C. Debit Interest Expense and credit Cash, $1950.
D. Debit Interest Expense and credit Cash, $5850.

Answer 1

Option A is correct

Step-by-step explanation:

The amount owed and the interest would be paid in six months' time ,hence,prior to that time,any interest incurred would be accrued for.

December 31 2021 is two months after the note payable agreement was reached ,as a result,there is need to record accrued interest for two months,November and December.

Interest accrued=$195,000*6%*2/12=$1950

Interest expense is debited while interest payable is credited