On October 1, Steve's Carpet Service borrows $350,000 from First National Bank on a 3-month, $350,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?
$\begin{array}{lrr}
\text { Interest Payable} &7,000\
\text { Interest Expense } &&7,000\\
\text { Interest Expense } &28,000\
\text { Interest Payable} &&28,000\\
\text { Interest Expense } &7,000\
\text { Interest Payable } &&7,000\\
\text { Interest Expense} &7,000\
\text { Notes Payable } &&7,000\

\end{array}$

Question

On October 1, Steve's Carpet Service borrows $350,000 from First National Bank on a 3-month, $350,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?
$\begin{array}{lrr}
  \text {  Interest  Payable} &7,000\
 \text { Interest Expense } &&7,000\\
 \text {  Interest Expense } &28,000\
 \text {   Interest Payable} &&28,000\\
 \text { Interest Expense } &7,000\
 \text {   Interest Payable } &&7,000\\
\text {  Interest Expense} &7,000\
 \text { Notes Payable } &&7,000\

\end{array}$

Quizplus · Accepted Answer

The interest expense accrued for the 3-month period can be calculated as follows:

Interest Expense = Principal x Rate x Time 
Interest Expense = $350,000 x 8% x 3/12 
Interest Expense = $7,000

Therefore, the entry that Steve's Carpet Service must make on December 31 before financial statements are prepared is:

Interest Expense 7,000 
Interest Payable 7,000

Option A is incorrect because it only records the interest payable and not the interest expense.

Option B is incorrect because it overstated the interest expense.

Option D is incorrect because it does not acknowledge the accrued interest expense.

On October 1, Steve's Carpet Service Borrows $350,000 from First