Question

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. The accrual of interest on December 31, Year 1 will:

Answer 1

Increase liabilities and decrease equity by $2,000

Step-by-step explanation:

Calculation for the accrual of interest on December 31, Year 1

Interest on Note Payable = $40,000 x 12% x 5/12 Interest on Note Payable= 2,000

Preparation of the journal entry

Dr Interest Expense 2,000

(Equity)

Cr Interest Payable 2,000

(Liabilities)

(Being Interest accrued)

Therefore based on the above Calculation The accrual of interest on December 31, Year 1 will Increase liabilities and decrease equity by $2,000