Johnson issues a $3,000, 5%, 100-day promissory note to Adam on November 1. What is the adjusting entry made by Johnson on December 31 to recognize the interest (using a 360-day year)? (Do not round any intermediate calculations. Round your final answer to the nearest cent.)
A) Debit Interest Expense; credit Interest Payable for $25.00
B) Debit Interest Expense; credit Interest Payable for $12.50
C) Debit Interest Receivable; credit Interest Income for $25.00
D) Debit Interest Receivable; credit Interest Income for $12.50

Question

Quizplus · Accepted Answer

The interest for 60 days (November and December) on a $3,000 note at 5% annual interest using a 360-day year is calculated as follows: Interest = Principal × Rate × Time = $3,000 × 5% × (60/360) = $25.00. Therefore, the adjusting entry is to debit Interest Expense and credit Interest Payable for $25.00.

Johnson Issues a $3,000, 5%, 100-Day Promissory Note to Adam