Jenni's Music Store borrowed $12,000 from the bank signing a 7%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be
A) Debit Interest Expense, $840; Credit Interest Payable, $840.
B) Debit Interest Expense, $70; Credit Interest Payable, $70.
C) Debit Note Payable, $840; Credit Cash, $840
D) Debit Cash, $210; Credit Interest Payable, $210.

Question

Quizplus · Accepted Answer

To calculate the interest accrued on the note for September, we need to use the formula:

Interest = Principal x Rate x Time

Time is calculated as a fraction of a year:

Time = 1/12 (because one month out of a total of three months has passed)

So, Interest = $12,000 x 0.07 x (1/12) = $70

The adjusting entry for the interest accrued on September 30 would be:

Debit Interest Expense, $70
Credit Interest Payable, $70

This entry recognizes the expense for the period and increases the liability to the bank for the interest owed.

Jenni's Music Store Borrowed $12,000 from the Bank Signing a 7