On October 1, 2010, you borrow $200,000 at 6% interest and record the promissory note. In April and again in October of the following year, you are required to pay half the annual interest to your creditor. On December 31, 2010, your journal entry for the quarter should:
A) debit Interest Expense for $3,000 and credit Interest Payable for $3,000.
B) debit Cash for $3,000 and credit Accrued Interest for $3,000.
C) debit Interest Expense for $6,000 and credit Cash for $6,000.
D) debit Interest Expense for $6,000 and credit Notes Payable for $6,000.

Question

Quizplus · Accepted Answer

Since you borrowed $200,000 at 6% interest, your annual interest expense is $12,000 ($200,000 x 6%). However, since you are paying half the interest in April and October, your quarterly interest expense is $3,000 ($12,000/4). 
On December 31, 2010, you need to record the accrued interest expense for the quarter. This means you need to debit Interest Expense for $3,000 (since you owe the interest expense but haven't paid it yet) and credit Interest Payable for $3,000 (since you owe the interest to your creditor). Option A matches this requirement.

On October 1, 2010, You Borrow $200,000 at 6% Interest